The United States retirement system is composed of three main parts, social security benefits, pension plan and personal saving. As regards the first two, you don’t have much say in the management process, also, you will receive a certain amount of money every month after you retire.
However, social security and pension are declining. According to Social Security Administration, 2037 would be the year in which the SSA estimates that it will to go bankrupt unless changes are made.
You, young ladies and gentlemen, would probably be the first generation to suffer.
What can you really rely on when you retire?
The answer is personal saving accounts, for example, 401(K) and IRA.
Now 401(K) and IRA are becoming more and more popular, there are basic concepts and knowledge you should know, since it attaches great important to your life now and in the future.
Personal Investment and Management
Unlike the social security or pensions, the 401(K) and IRA accounts are similar to personal investment account, or just the same to some extent. You should choose portfolio first, usually some funds, stocks and bonds, and then contribute money to your own account. When you retire, you can withdraw money from it.
In that case, you have great autonomy in handling with your own retirement account to make sure you have a happy life.
The most important feature of 401(K) and IRAs are that, they are tax advantaged accounts. But remember, it doesn’t mean that you don’t pay income taxes, you still have to, sooner or later, depending on what type of accounts you choose.
Compared with other investment account, the advantages are that you don’t have to pay capital gain tax for the growing part. All the gains are treated as “ordinary income”.
Difference between 401(K) and IRA
- 401(K) accounts are provided by employers, while IRA accounts are set by yourself.
- Generally, you can’t invest in stocks within 401(K) accounts, exceptions are that some companies may allow employees to invest in its own shares. IRA has a wider range of choice, including almost all the stocks, bonds and funds.
- Usually, employer will match a certain percentage to employees’ 401(K) accounts, which means that your company is paying for you.
Personal savings accounts are gaining its popularity, and gradually become an important part in our life. Whether you are a student or already at work, retirement is one thing you should think over, because it may decide your current lifestyle and the future quality of life when you retire.