Farnoosh Torabi is a financial expert, host of the podcast So Money and co-founder of Stacks House, a massive experiential museum for female financial empowerment. Currently stationed in downtown L.A., Stacks House, together with its presenting partner Zelle, as well as Charles Schwab and Day Owl, plans to travel the country and make financial literacy fun. Use this link for 40% off your ticket.
Women, I’m told, are obsessed with retirement. Over the past four years as the host of a financial podcast, my largely female audience has been sending me their biggest money concerns over email, Instagram DMs, and during chance run-ins on the A train. One of the most pressing issues I hear from listeners is how to prepare for retirement. Specifically, women want to know: Where do I begin investing so that I can have enough when I retire? Our obsession makes sense. We’re living longer than men (on average) and have the wage gap to battle, which makes shoring up money for the golden years all the more stressful. In a recent survey by Charles Schwab, three out of four young women said putting together a financial plan is very important to reaching their financial goals—versus 64% of young men. Should I invest in a 401(k)? How about a Roth IRA? And, wait. There’s a Roth 401(k)?
The questions I field often relate to all the different accounts and how they work. If all the financial lingo is getting in the way of you and your older, richer self, I have some help. Here’s a breakdown of some of the most common retirement accounts and whether they’re right for you.
Workplace Retirement Accounts
what (and I cannot stress this enough) the fuck is a 401k
— Betches (@betchesluvthis) February 15, 2019
Best for: Those with access to a plan that carries a company match. If you’re not sure where to begin investing and have access to a 401(k) through your job, this may be a great place to start. Named after a section of the IRS code, the almighty 401(k) is the most popular retirement savings vehicle. Recent numbers show about 80 million people are actively participating in a 401(k) or a “defined contribution plan.” Many employers offer 401(k)s as a workplace benefit. (If you work for a non-profit, school or government office, your plan is probably called a 403(b). It basically works the same way.)
You get to contribute automatically out of every paycheck. And with the help of the plan provider, you can select your investments within the plan to reflect your risk tolerance and retirement age. Annual contributions are capped
at $19,000 in 2019 or $20,000 if you are age 50 and over and can be deducted from your taxable income, which helps you save on your taxes today. Your tax burden is then pushed off until you start making qualified withdrawals at age 59 ½.
Bonus: Some employers will throw in a match. For example, they may provide a dollar for every dollar you invest, up to, say, 5% of your salary. And if that is the case, you should absolutely invest in a 401(k) to at least earn the company match. It’s sort of like free money!
Traditional Individual Retirement Accounts (or Traditional IRAs)
Best for: Those who may not have access to a workplace retirement account and want to save on taxes today. The traditional IRA (Individual Retirement Account) is a popular retirement savings vehicle that you can open up at a financial institution or bank. Like a 401(k), contributions made to a traditional IRA are tax-deductible up to $6,000 in 2019 ($7,000 if you’re 50 or older). Funds aren’t taxed until they’re withdrawn, but there is a penalty for taking money out before age 59 ½.
At this point my retirement plan is just banking on the fact that climate change will kill us all by 2030
— Betches (@betchesluvthis) February 15, 2019
Best for: Those who think they’ll be in a higher tax bracket in retirement (i.e. most young people). Or, those who want to save for retirement, but are concerned they may need the money sooner. A Roth IRA is another type of individual retirement account. It is similar to a traditional IRA as far as the contribution limits go. This year’s cap is $6,000. The major difference is that you can’t deduct your contribution from your taxable income today. Instead, the tax benefit arrives later down the road, when you pay zero taxes on all future withdrawals in retirement (and when adhering to Roth IRA rules).
Another thing to note about Roth IRAs: You can’t contribute if you earn too much money. This year, if you’re filing taxes single, you’re no longer eligible for a Roth IRA once you earn $137,000 or more. For married couples filing jointly, you become ineligible at $203,000. The Roth IRA is also unique in that you can take out your contributions (note: not your earnings on the contributions, just contributions) at any time without facing a tax or penalty. Some really like this benefit because it provides better flexibility of accessing your money if you really need it.
Pro tip: If you already have a 401(k) or another type of employer-sponsored retirement account where contributions are tax-deductible—and you’re looking to diversify your tax exposure in retirement—a Roth IRA can be a solid vehicle for that purpose.
Best for: Those who want the best of both worlds. Now that we’ve reviewed the basics of 401(k)s and Roth IRAs, you can probably imagine how a Roth 401(k) works. Like a 401(k) this is an employer-sponsored investment savings account. The money you set aside, like a Roth IRA, is done so with after-tax dollars. You don’t get to deduct your contribution from your taxable income today, but you can make qualified withdrawals in retirement tax-free. Roth 401(k)s offer the higher contribution limits of a 401(k). And while a Roth IRA limits who can contribute based on income, a Roth 401(k) doesn’t have that rule.
Images: Alexander Mils / Unsplash; betchesluvthis / Twitter (2)