now, first thing up, what are the different types of retirement accounts? There are 401KS. 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. Again it does come from traditional employment, but it generally means you work for a nonprofit like a five oh one C three, 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 Ira's play a really big role and there are multiple types of iras, which we will also be talking about a bit later. But this these are the three terms I will be referring to time and time again throughout this part of the class. So we just w...
anted 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 going to 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 want to check the fine print because sometimes a company might say something like you have to work here for at least a year before you are eligible to contribute to our company 401K. You also do want to keep an eye on that eligibility to one. Make sure that you're 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 you get access to the four oh one K. You can start putting your money in there. Do you get a 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 401K. In order for your employer to also match you at 4%. So in real terms let's say you're in $35,000 and they say you have to contribute 4% in order to get the full match that's $1400 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 $1400 in there actually ended up with 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. It'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%, But you can get up to 4%, they're still going to 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 two. 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 401K. 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, 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 going to 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 E. T. F tends to be just a bundle of different investment options altogether. 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 a fee is one less dollar that's compounding for you for the future. So you do want to be mindful of these fees. The other one that you should know is plan administration and investment costs again, all of this stuff costs money. Typically your employer is going to actually slice up the cost of having a following K offering and divvy it up amongst you the employees. Another thing you're going to come up against is figuring out do I want to invest in a Roth or a traditional account some employers offer Roth and traditional 401 Ks. You definitely will hear this term if you're 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 when you're in, I'm just glad that you're getting started and I will say a lot of people do tout Roth for those of us who are younger. The reason being the thought processes, 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. Now, like I said earlier, both following Ks 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 want to 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 on I. R. S dot gov. It's the I R. S actual website, make sure it's the dot gov dot dot com. That's a very different website and it's not backed by the federal government. So I r s dot gov has all the information if you're ever curious, and they make it very easy to understand a little questionnaire and then a little grid that they give you at the end.