What Is A Retirement Account?
Just the phrase “retirement account” can send some people into a whirlwind of stress and anxiety. It can conjure feelings of surviving on a fixed income, a long and rigid saving strategy that makes for a dull lifestyle, or simply stir fear that our youth and vibrance are fleeting. But a retirement account is not something to fret over. Building a nest egg can feel liberating and provide tremendous peace of mind. So, what is a retirement account?
A retirement account is a special type of savings plan designed to help people set aside money for their future, specifically for when they stop (or slow) working - in other words, retire. The idea is that while you're working, you regularly put money into this account, and it grows over time, usually by earning interest or being invested in things like stocks or bonds.
There are different kinds of retirement accounts, but they all have one goal: to make sure you have money to live on when you're no longer earning a paycheck. Some accounts get help from your employer, while others you can set up on your own. The government gives special tax benefits to these accounts to encourage people to save for the future.
In short, a retirement account is a smart way to make sure you have money to support yourself after your working years are over.
Types of retirement accounts
There are two main types of retirement plans: One is a defined benefit plan, commonly known as a pension, which most employers no longer offer. The other is a defined contribution plan, which is much more common today. Defined contribution plans include options like a 401(k), 403(b), Traditional IRA, and Roth IRA. Most Americans’ retirement plans fall under this category.
Employer-Sponsored Plans:
Both 401(k) and 403(b) are retirement savings plans in the U.S., where employees contribute a percentage of their paycheck towards retirement, and in many cases, employers match a portion of those contributions. However, these accounts have some important differences, mostly related to the types of employers that offer them. We’ll break them down here:
401(k):
- Offered by: Private sector employers, such as businesses and corporations.
- Eligibility: Available to employees of for-profit companies.
- Contribution Limits (2024): $22,500 for employees under 50, with an additional $7,500 catch-up contribution for those over 50.
- Matching Contributions: Employers may offer matching contributions, but it's not required.
403(b):
- Offered by: Non-profit organizations, public schools, churches, and certain government agencies.
- Eligibility: Available to employees of non-profits and tax-exempt organizations.
- Contribution Limits (2024): Same as 401(k)—$22,500 for employees under 50, with an additional $7,500 for those over 50.
- Extra Catch-Up Contributions: Employees with over 15 years of service may be eligible for additional catch-up contributions beyond what a 401(k) allows. Check with your provider to see if you qualify.
- Investment Options: 403(b) plans may offer more limited investment options, such as annuities and mutual funds, while 401(k)s tend to offer a wider variety of investment choices.
Be Retirement Confident.
Roll over all your old 401(k)s into a PensionBee Individual Retirement Account (IRA). It takes just a few minutes to sign up.
Get startedIndividually-Sponsored Plans:
An IRA (Individual Retirement Account) is a retirement savings account that individuals can set up independently, outside of employer-sponsored plans like a 401(k) or 403(b). IRAs are ideal for people who want to supplement their employer-sponsored plans or for those who don’t have access to one.
There are several types of IRAs, each with specific tax benefits. PensionBee offers an in-depth look at IRAs in another article titled: What is an IRA? The two most common types are the Traditional IRA and Roth IRA.
- Traditional IRA:
- Tax Benefits: Contributions may be tax-deductible, and investments grow tax-deferred. However, withdrawals in retirement will be taxed as ordinary income.
- Contribution Limits (2024): Up to $6,500 per year if under 50, with an additional $1,000 catch-up contribution for those over 50.
- Required Minimum Distributions (RMDs): You must begin taking withdrawals at age 73.
- Roth IRA:
- Tax Benefits: Contributions are made with after-tax dollars (not tax-deductible), but qualified withdrawals in retirement are tax-free.
- Contribution Limits (2024): Same as a Traditional IRA—$6,500 per year under 50, with a $1,000 catch-up for those over 50.
- Income Limits: Roth IRA eligibility phases out for individuals earning over $153,000 for single filers (2024).
- No Required Minimum Distributions (RMDs): You are not required to take withdrawals at any age.
Required Minimum Distributions (RMDs)
RMDs are the minimum amounts that you must withdraw from your retirement accounts annually, starting at age 73 (for 2024). Roth IRAs do not have RMDs during the account holder’s lifetime, but other plans like Traditional IRAs do.
If an investor doesn’t withdraw the required minimum, they may owe an excise tax. Withdrawals must start by April 1 of the year after the investor turns 73.
Why PensionBee Makes Sense
If all of this sounds good, it’s time to start investing in your future. But how?
The process of opening an IRA is straightforward and it allows you to take control of your retirement planning with more control. Most banks and financial institutions offer IRA options, allowing you to transfer funds directly from your bank account into the IRA of your choice.
PensionBee makes retirement planning easier. Investors can track how their money is being invested, and a US-based account manager (known as a BeeKeeper) will assist you throughout your retirement journey. Having clear visibility and support makes PensionBee a great choice for your retirement needs.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.
