Investment Retirement Account

Cidette Rice

Dr. Ott

Investing A-Term

3/31/2021


Retirement Options


    Within the realms of retirement, there are many different opprotunities and styles when it comes to saving money. The general idea is that when it comes to retirement, your two options are to use an individual retirement account (IRA) or a 401k. While these are both good ideas, it should be noted that not only can you have BOTH an IRA and a 401k, but that there's many varities of each. On average, the stock market's return rate is 10% each year, meaning that if you invest $10 at the start of 20xx, you'll have $10.10 by the following year. This is exactly how an IRA works, with some rules and exceptions. Anything with "IRA" in the name follows the same rules, unless stated otherwise.


 IRA (Investment Retirement Account)

  • Long term investment (think 20-50+ years)

  • Low risk, you deposit your money and let it sit and collect until you retire

  • 7-10% return rate

  • Max $6,000 deposit every year, $7,000 after age 50

  • Required minimum annual distribution 

  • Deposits and withdrawls are both taxed

  • 10-40% tax penalty if money is removed before age 59 ½ (penalties can be overridden in cases like college expenses, birth, first home loans, medical expenses, etc.)

  • Number of investments that can be made is unlimited

  • Income growth in taxed


ROTH IRA

A ROTH IRA follows many of the rules a regular IRA does, unless stated otherwise. A good rule of thumb for anything with "ROTH" in the name is that it's partially exempt from taxes. As of 2020, you are not allowed to contribute to a ROTH IRA if you are single and make $140,000, or if a married couple is joint filing and makes over $208,000. However, there is a way to get around this that I will mention later. 

  • Long term investment (20-50+ years)

  • Low risk

  • 7-10% return rate

  • No required minimum annual distribution

  • Deposits are taxed, withdrawls are not

  • 10-40% penalty

  • Income growth is not taxed

  • Cannot contribute to a ROTH IRA if your income is higher than a specific amount (can change from year to year)


BACKDOOR ROTH IRA

A backdoor ROTH IRA is a ROTH IRA that can be contributed to by people over the income limit. The only thing you need to do is convert an IRA into a ROTH IRA. There is a large conversion penalty, so the conversion would be a bad idea unless you believe you’ll be able to make profit by converting to the ROTH. One reason you might convert to a ROTH IRA from an IRA is because you made your IRA before the ROTH IRA was legalized in 1997.

  • Sounds pretty suspicious, but in reality it’s completely legal

  • Large conversion penalty

  • Long term investment (20-50+ years)

  • Low risk

  • 7-10% return rate

  • No required minimum annual distribution

  • Deposits are taxed, withdrawls are not

  • 10-40% penalty

  • Income growth is not taxed


401K

A contract made between an employer and an employee, that often states the employee will fully or partially match whatever an employee puts down for retirement. The 401k’s rules and regulations vary from business to business, but will most often be based on that condition.

  • The employee deposits a part of their pre-tax salary into an investment account

  • Limited amount that you can annually deposit

  • A 401k can often be converted into an IRA, resulting in a rollover IRA

  • Opinion: DO NOT SOLELY RELY ON ON YOUR 401K FOR RETIREMENT!!! THAT IS A VERY BAD IDEA!!!


Other ways to save for retirement:

ROLLOVER IRA (401K)

403B (Community funded retirement)

457B (Small business and government 401K)

ROLLOVER IRA (SPOUSAL) (An IRA that is given to you by your partner, and you are allowed to access the funds when you are both over 59 ½ and you are both retired)

ANNUITY FUNDS (a bad idea, long term investment but doesn’t account for inflation. You WILL lose money.)


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