Personal Finance / Unit 4: Saving and Investing
4.7 Retirement Accounts
Notes
Retirement accounts are designed for long-term saving and have tax advantages.
- A 401(k) is a plan through an employer. Contributions come from your paycheck. Many employers offer a match, which is extra money added when you contribute.
- An IRA (individual retirement account) is one you open yourself.
- Traditional accounts: contributions are usually pre-tax, and withdrawals in retirement are taxed. Roth accounts: contributions are after-tax, and qualified withdrawals are tax-free.
- Withdrawing early (generally before about age 59 and a half) often brings taxes plus a penalty.
- Example: you earn $50,000 and contribute 6%, which is $3,000. An employer that matches 50% of that adds $1,500.
Practice
What is an employer match?
A match is like added pay for saving.
Ben earns $40,000 and contributes 5% to a 401(k). His employer matches 100% of his contribution. How much does the employer add?
His contribution is $40000 \times 0.05 = 2000$. A 100% match adds $2,000.
What is the main difference between a traditional and a Roth account?
They differ in when the tax is paid.
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