Retirement Account Basics

Okay, let's see a show of hands:  how many of you had your curiosity get the best of you, and you broke down and watched Justin Bieber on YouTube?  Well, trying as always to at least make appearances to keep current, some of us on MomVesting also gave it a go.  Know what? Those are minutes of our life we've invested that we'll never get back, and they didn't even yield any kind of a return.  (By the way, you can put your hands down.  You do realize we can't really see you, right?)

Making the leap to finances, imagine those minutes spent in front of YouTube were money, and the video was the return.  A bit sad, wouldn't you say?  A much better option would be a retirement account. These accounts generally have better tax treatment than regular accounts, but offer less flexibility. Unlike with those Justin Bieber videos, your time is well spent, and you get something back for investing it and your money.  We'll take a look at the ins and outs of retirement accounts, and how they are a neat, safe bet for your money.

Types of Accounts

Retirement accounts are nothing new, and chances are you've heard of them.  Though these kinds of accounts are not always available in all types of work or jobs, many employers offer them up to their employees.  You're probably most familiar with the 401(K) and/ or the 403 (b).  Both are similar, with the 401 being used primarily in for-profit companies, and not-for-profit organizations using 403 accounts.  Think of these nifty accounts as a payroll slot machine with guaranteed winnings.   You designate a certain part of your pay to go into the account.  The "winnings?"  Your employer, more often than not, will also put money into your account; the amount varies, but often it is a certain percentage of your contribution. 

IRA who?

Not who, but what.  An IRA is an Individual Retirement Account and is usually not affiliated with your workplace.  What's neat about these accounts is that you are able to deduct whatever you contribute to the account from your taxes for that year.  It's when you are ready to withdraw funds, however, that you should be ready to pay taxes on what you've withdrawn. 

We also would be remiss if we didn't mention another type of IRA: the Roth IRA.  Very similar to its "regular" counterpart, the Roth IRA won't get you any tax deductions, but when you want to withdraw some money, you can do so without paying any taxes on those funds.

Finally, for those of you out there who punch your own time clock, there are accounts like the SEP-IRA specifically geared for you as well.

The Long Haul

Given that no one wants to pay taxes, why wouldn't you put all your money into these accounts? The primary reason is that they have restrictions on when and how you can take the money out, that usually being that you can't get at the money until retirement age.

Thus the "long haul" should describe your money when it comes to retirement accounts.  Whether you have a daily 9-5 routine, or if you stay home with Junior, it probably doesn't seem like retirement will ever get here.  Trust us, it will, and sooner than you think.   You're probably going to want some kind of money to live on when you get to those "golden years."  Hence, all the talk about retirement accounts.  Here's the big heads-up, though: make sure you can do without the money you're forking over to your carefully considered and chosen account.  Once in the account, that's where it should stay until your working days are behind you, or else you could find yourself paying hefty early-withdrawal penalties.

One last thought on this topic: take care of your money now (and have it do some virtually risk-free working for you!), and it will take care of you in your later years.

What steps are you taking to prepare for retirement? Do you feel like they're sufficient?

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