401(k). IRA. Tax-deferred. Diversification. Micro-investing.
These retirement terms and acronyms can be confusing for anyone. However, sorting through all the jargon doesn't need to keep you from planning for retirement!
To help you learn the lingo, here are eight common retirement terms made simple:
#1: Asset — This is something you own that has the potential to increase in value and possibly earn money for you. Some examples of assets include stocks, bonds, real estate and other investments.
#2: 401(k) — An employer-sponsored retirement savings plan that allows employees to make scheduled contributions from their paychecks. The money you contribute to a 401(k) is tax-deferred, meaning you won't pay taxes on your funds until you're ready to withdraw them at retirement.
#3: Employer Match — Many employers who provide 401(k) plans will sometimes offer to match a percentage of the contributions you make. If your employer offers a program like this, it's beneficial to you to try to contribute enough to receive the full match. If you don't, it's like leaving “free money" for retirement on the table!
#4: Individual Retirement Account (IRA) — Unlike a 401(k), which is provided through your employer, an IRA is an investment account you can open on your own. There are two types of IRAs: Traditional and Roth. The main difference between the two types is when you pay taxes on your investments.
Traditional IRAs let your earnings grow tax-deferred. This means you won't owe taxes on your investment gains while the money remains in the account. You'll pay regular income tax only when you make withdrawals from your Traditional IRA in retirement.Roth IRAs work in almost the opposite way as Traditional IRAs. There's no up-front tax break, but you will receive a tax advantage when it's time to make withdrawals in retirement.
Traditional IRAs let your earnings grow tax-deferred. This means you won't owe taxes on your investment gains while the money remains in the account. You'll pay regular income tax only when you make withdrawals from your Traditional IRA in retirement.
Roth IRAs work in almost the opposite way as Traditional IRAs. There's no up-front tax break, but you will receive a tax advantage when it's time to make withdrawals in retirement.
#5: Rollover — When you change jobs, what happens to your 401(k) account? You could choose to roll your old account into a 401(k) with your new employer if one is offered. Or, you could choose to roll it into an IRA. Having your retirement funds in one place can make it easier to manage your money and track your progress!
#6: Diversification — A long-term investment strategy that involves spreading out your money among different types of investments. The idea is that diversifying your funds can help to reduce risk while still giving your money the chance to grow.
#7: Micro-investing — A method that allows you to invest very small amounts of money by buying fractions of shares. Micro-investing apps are popular because they can help new investors learn the basics of investing without a large financial commitment.
#8: Retirement calculator — A tool to that can help estimate how much money you'll need for your retirement. Using a retirement calculator can give you an idea of how well you've prepared and what you can do to improve your retirement outlook.
It's never too early to start preparing for a happy retirement!
If you're new to retirement planning, the experienced CFS* Financial Advisors on Wright-Patt Credit Union's Retirement Solutions team, available through CUSO Financial Services, L.P. (“CFS"), are here to help you develop a roadmap to pursue your retirement goals. Schedule a complimentary, no-obligation appointment with one of our CFS Advisors today!
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. WPCU has contracted with CFS to make non-deposit investment products and services available to credit union members. For specific tax advice please consult a qualified tax professional.
Before deciding whether to retain assets in an employer sponsored plan or roll over to an IRA, an investor should consider various factors, including but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.
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