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Retirement Accounts

So, what should you be looking for in a retirement account? There are so many different types of accounts, there are also a bunch of fees, there are a bunch of different technicalities. So, buckle up we are going to dig in to all of these different factors. And, again, please if you have questions, raise your hand, chime in on the live chat. I really do wanna be answering those in real-time for you as well. Now, first thing up, what are the different types of retirement accounts? There are 401(k)s, that's generally the term you hear when you're thinking of someone who is traditionally employed and has an option through an employer. You have a 403(b), agan, it does come from traditional employment but it generally means you work for a non-profit, like a 501c 3, maybe you work for a government agency as well. Teachers often, some of them have access to pensions if you work for a public school. Some also have access to 403(b)s, depends on your district. And then the individual retirement ...

arrangement or account, depends on who you ask. But the almighty IRA is another option. Now, especially when we get into talking about options for the self-employed, IRAs play a really big role. And there are multiple types of IRAs, which we will also be talking about a bit later. But these are the three terms I will be referring to time and time again throughout this part of the class. So, I just wanted to familiarize ourselves with them. When are you eligible to contribute? Well, first up, as soon as you're earning taxable income you can be putting money away into an IRA. So, if you're in college right now and you are making some good money and you're like, "Hey I magically have "the rest of my life figured out financially, "I'm gonna start putting money away into an IRA.", you're earning taxable income, you can go ahead and get started. But otherwise, with a company you usually wanna check the fine print because sometimes a company might say something like, "You have to work her for at least a year "before you are eligible "to contribute to our company 401(k)." You also do wanna keep an eye on that eligibility. To one, make sure that your immediately taking advantage when you have access. And two, because in the meantime, in order to get into the habit you might want to be dumping money into an IRA that you can open up yourself. So, you don't have to necessarily do it through a company. So, you're not holding off on a year waiting for retirement planning to start. You can start saving yourself into an IRA, then when you get access to the 401(k) you can start putting your money in there. Do yo get a match? An employer sponsored retirement plan often, not always, comes with an employer match. This is a term you're gonna hear a lot when you learn about retirement, talk about retirement. Benefits at the workplace that first day of work at a new job where you're filling out all that paperwork and super boring and have to watch stupid videos and at some point you're probably gonna come across a piece of paper that talks about your retirement plans and mentions the match. So, does your employer match your contributions? For example, it might sound like something such as, we match you 100% up to 4%. Well, what does that mean? That means that you have to put 4% of your salary into the 401(k) in order for your employer to also match you at 4%. So, in real terms, let's say you earn 35 thousand dollars and they say you have to contribute 4% in order to get the full match. That's 1,400 dollars that you need to put into your 401(k) each year and then your employer will do the same. So, that means you easily, by putting 1,400 dollars in there actually ended up with 2, because your employer matched and put in the same amount. You will hear people harp on this time and time again, myself included, get your employer match because it's essentially free money. That's one of the only opportunities we have in life to just straight-up get some free money from somebody. Now, the other part is there are a lot of different caveats when it comes to the matches and I do dig into those a bit later on. But one of them is this idea that, not always, but most of the time, your employer will not put money into your retirement account unless you do as well. And then they only match you at the amount that you put in. So, if you're in a situation where you can only afford to or you only choose to put 2% in but you can get up to 4%, they're still gonna just match you at 2% as opposed to the full 4%. Not always. Some are very benevolent and regardless will put the full 4% in. And that's not always the number too, that's just for example. Sometimes it's three, sometimes it's 10, that's very rare. But it goes all across the board how much your employer will put in as a match. But generally they don't do it unless you do it. Another thing to understand is when you can enroll. Some places will automatically opt you in. So, you actually have to opt out of a 401(k) plan. That's starting to be a little bit more common in order to encourage employees to actually be saving for retirement but most of the time you have to be proactive yourself. Again, there's so many shades of gray. Some employers will put a match in there regardless. But most of them require you to do it. It's meant to be an incentive to get you to save. Plus, they don't wanna pay you free money if they don't have to. I'm gonna be honest, I think that's more of it. It's not just them trying to encourage you to save for your retirement. The other thing is what will this cost me. I'm not gonna dig too deep into these different terms but I do want you to understand some different fees that are probably gonna come along with your 401(k) plan. Again, we are investing here, hopefully. Some people do actually just have money sitting in cash assuMing it's invested and it's not which is why we're gonna talk later about how to make sure that you know you're invested. But you might hear a term like, expense ratios. So, an expense ratio is essentially the fee that you're paying for the investment. A lot of times it's on something like a mutual fund or an index fund. If you're unfamiliar with those terms, that's okay, I'm gonna dig into them in a little bit. But a mutual fund or an index fund or an ETF tends to be just a bundle of different investment options, all together. And investment firms have to make some money, too. So, they charge what's known as an expense ratio. So, typically it's a small percentage of the overall fund that you have to pay in order to be investing in it. Now, the reason I bring it up is because some have higher fees than others and it's important to pay attention because every dollar you're paying in a fee, is one less dollar that's compounding for you for the future. So, you do wanna be mindful of these fees. The other one that you should know is plan administration and investment cost. Again, all of this stuff costs money. Typically your employer is going to actually slice up the cost of having a 401(k) offering and divvy it up amongst you, the employees. This isn't, you know, I'm not saying they're bad guys, it's a product that they're offering you, they also have to pay for it. But just know, the cost of the plan administration is something you likely are absorbing in some small percentage. It's a couple less dollars that's going towards future you. And, finally, account maintenance, sometimes known as investment advisory, sometimes known as a management fee. It depends on the type of investments in your retirement portfolio. But if you hear the term, actively managed, it means a human is in there tinkering and picking out what investments are in there and you have to pay that human. So, you usually have to pay an account maintenance fee. If you're invested in what's known as passively managed funds, such as index funds, it means that it's pretty much automated, there's not a human tinkering. So, it's a bit cheaper. I'm not doing a deep dive into these terms 'cause it's just a whole 'nother rabbit hole we could go down but I just wanna do some baseline understanding on that. Another thing you're gonna come up against is figuring out do I wanna invest in a Roth or a traditional account? Some employers offer Roth and traditional 401(k)s. You definitely will hear this term if you are investing into an IRA. So, what does that mean? A traditional account means that you are investing with pre-tax dollars. So, you get a tax break right now, today. The money that you are putting into your retirement plan, you have not yet paid taxes on those dollars so it's lowering your overall tax liability today. So, you have to cut a slightly smaller check to Uncle Sam right now. Now, with Roth, we're going the opposite direction. It's money that you did already pay tax on. So, it's not giving you any sort of tax break right now but in the future, when you're taking that money out in retirement you don't have to pay tax on it. So, you get that advantage in the future. Which one is better? It totally depends. And I know that's an infuriating answer but it really, truly is the answer. As long as you're investing for retirement I don't totally care which one you're in I'm just glad that you're getting started. Now, I will say lot of people do tout Roth for those of us who are younger. The reason being the thought process is you're probably in a lower tax bracket today. You're not making as much money. So, in the future when you take the money out and you would be in a higher tax bracket, well, you've already paid the taxes on that money so you don't have to pay taxes again. Question. You might be covering this but does that mean you're putting the money in at different points? Like, if, So, I think the-- If I'm self employed and just have income that's not taxed, how am I putting into a Roth? So, you would still be able to put into a Roth because you're paying those quarterly estimated taxes. So, you're still paying your tax bill. So, I understand that you feel like it hasn't funneled through a process where you already actually paid taxes on it but you have money that you're setting aside to pay your quarterly estimated tax bill. So, you're still paying taxes to the government. What's going to be happening is that when you run your actual annual tax or your income report at the very end of the year, you'll be fiddling with these numbers and being like, "Oh, well I maxed out an amount of money I could put away "into a traditional account." It might have lowered your tax liability so maybe you would have gotten a refund check from the government. Where on the flip side, if you put money into a Roth account it might be like, "Nope, I paid you exactly what I owed you. "I didn't change how much money I made this year." Because when you pay your quarterly estimated taxes, you're essentially doing the same thing that a traditional employed person is doing, 'cause they're paying taxes throughout the year every time they get a paycheck. And then all of us at the end of the year regardless of how you are employed still have to do an annual tax return. And still have to pay all that perhaps lingering tax bill. But some of us get a refund. So, it just depends. Yes. So, it's kinda morbid but what happens with your IRA or retirement funds if you pass. Like, if I've put money in to say, like, a Roth IRA and, you know, which to me seems like the best thing 'cause I'm just gonna put money in there and then I know it's paid and I'm not gonna worry about it when I'm a aging population. But then, I already paid all this tax money. What happens to your IRA when you pass? Is it part of an inheritance that goes to other people? Yes. And they don't have to worry about the taxes, I just don't know much about that. I am not going to go down the taxation rabbit hole because I'm not a tax expert and it varies on different states and the state taxes. But I will say whenever you set up any sort of account like this they generally ask you for a beneficiary. Always put one on there. So, whomever it is. And then also as life stages happen, so, marriage, kids, divorce, anything like that. Go in and update your benificiaries. Also just a fun fact, kind of unrelated, a beneficiary usually can overwrite a will. Not always but usually. So, even if you updated your will, if you didn't update your benificiary it's still going to whomever your benificiary was. Just something to know about estate planning. So, when it comes to any of these accounts, even bank accounts, you can actually have benificiaries on those which helps the process that if, especially if you don't have a will outlined and you die unexpectedly they know who to give the money to. Now, the taxation on that, I honestly can't speak to that 'cause it really does depend. Any other questions? Alright, now like I said earlier both 401(k)s and IRAs can be Roth or traditional but there's one other part that I want you to think about and that is income limits. You wanna make sure that you're actually eligible to contribute to a Roth. Because they do phase out your eligibility depending on how much money you earn. The higher you go up in tax brackets, they really don't want you to be taking advantage of this loophole that they legally allowed to exist. But they do phase you out in your ability to contribute to a Roth IRA. So, do be sure to always check that information before you go in and contribute. You can find all of that in irs.gov, it's the IRS actual website. Make sure it's the .gov not .com, that's a very different website that's not backed by the federal government. So, irs.gov has all the information if you're ever curious. And they make it very easy to understand. The little questionnaire and then a little grid that they give you at the end.