The Basics of Retirement Accounts

Assalamu Alaikum girlie! 🌺

Ever thought about your future and wondered how to secure it financially? Let's break down the basics of retirement accounts. 🏖️💰

Today, we’ll cover:

• What is a retirement account?

• Types of Retirement Accounts

• How do Retirement Accounts work?

• How Do People Benefit from Retirement Accounts?

Let’s dive in! 📈💰

What is a Retirement Account? 

A retirement account is a financial arrangement designed to help you save and invest money for your retirement years. Some of these accounts often come with tax advantages to encourage long-term savings and serve as a tool to build wealth.

note: the retirement accounts discussed here are US-specific

How Do They Work?

1. 401(k): Offered by many employers, allowing you to contribute a portion of your paycheck before taxes. Some employers even match your contributions.

   • Contributions: Employees contribute a portion of their pre-tax salary, often with employer matching contributions. Employers might offer to match up to a certain percentage of the employee's contribution.

   • The IRS allows you to withdraw funds from retirement accounts at 59 1/2 years-old without any penalty, and require withdrawal after 72 y/o.

   • Investment Options: Plans typically offer a range of investment options like stocks, mutual funds, etc.

   • The employee contribution limit in 2024 have increased to $23,000 from $22,500 in 2023. (source: irs.gov)

2. IRA (Individual Retirement Account): A personal retirement account that offers tax advantages. There are two main types: Traditional IRA and Roth IRA.

   • Traditional IRA: Contributions may be tax-deductible, but withdrawals in retirement are taxed.

     • Since contributions are made with pre-tax dollars, the money grows tax-deferred.

     • Ideal for those foreseeing the same or lower tax brackets during withdrawal

     • Withdrawals are penalty-free but taxed as current income after age 59½

     • Mandatory distributions after age 73 (source: irs.gov)

   • Roth IRA: Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.

     • Since contributions are made after-tax, the money grows tax-free

     • Best suited for individuals expecting higher tax brackets upon withdrawal

     • Withdrawals are penalty-free after 5 years and age 59½

     • No mandatory distributions (source: irs.gov)

4. SEP IRA: Simplified Employee Pension IRA, ideal for self-employed individuals or small business owners.

5. Solo 401(k): For self-employed individuals with no employees, offering high contribution limits and tax benefits.

How Do Retirement Accounts Work?

1. Contributions: You contribute money regularly into your retirement account. For employer-sponsored plans like a 401(k), contributions are often automatically deducted from your paycheck.

2. Investments: The money in your retirement account is invested in various assets like stocks, bonds, mutual funds, or ETFs. Your investments grow tax-deferred or tax-free, depending on the type of account.

3. Withdrawals: When you reach retirement age, you can start withdrawing money from your account to cover your living expenses. Different accounts have different rules regarding withdrawals and taxes.

How Do People Benefit from Retirement Accounts?

1. Tax Advantages: Contributions to Traditional IRAs and 401(k)s may reduce your taxable income. Roth IRAs offer tax-free withdrawals in retirement.

2. Employer Matching: Many employers match a portion of your 401(k) contributions, providing you with free money to boost your retirement savings.

3. Compound Growth: The money in your retirement account grows over time through the power of compounding.

4. Financial Security: Having a dedicated retirement account ensures you have a financial cushion to support yourself in your golden years Inshaa Allah.

The key in investing is to JUST START! If you’re wondering “how”?

Be sure to read next week’s email because I’ll give you the blueprint to take to your HR rep!

I’ll catch you next week Inshaa Allah

Invest now and build wealth,

Fatimah ✨

disclaimer: this is intended for educational purposes only, none of which constitutes specific financial advise.