401K, Roth, Traditional & Brokerage Accounts - what's the difference?

401K, Roth, Traditional & Brokerage Accounts - what's the difference?

What’s the difference between a retirement account, a ROTH IRA, a traditional IRA and a Taxable Brokerage?

I made this blog super simple to follow. No fluff - just facts!

Retirement account (401K/403b/457b)
-An employer sponsored retirement account
-Employees can contribute pre-tax salary
-Some employers offer a match (employer contributes a certain amount to your retirement based on your annual contribution)
-Investments are tax-deferred (you don’t pay taxes) until you withdraw them
*Each of these retirement accounts are available for specific types of employees.

Roth IRA
-Post tax contributions (don’t pay taxes when you withdraw them because you already paid taxes on the earned income.
-Contributions grow tax free (Won’t pay taxes on gains, dividends, or interest earned)
-Little known fact - you can withdraw anything you contributed penalty free
-You may also withdraw for things like purchasing your first home or medical expenses without incurring the usual 10% early withdrawal fee
-Withdraw tax free when you retire
-Typically we say this is a good account for someone who expects to be in a higher tax bracket when they retire
-No current year tax benefits
-Anyone can contribute under a certain income level
-No mandatory distributions

Traditional IRA
-Pre-tax contributions
-Typically we say this is a good account for someone who expects to be in a lower tax bracket when they retire (why? Because you are waiting to pay taxes on this money. Instead of paying taxes on it now at a potentially higher tax rate)
-Contributions grow tax-deferred
-Gives you immediate tax benefits
-Anyone with earned income can contribute
-Withdrawals Taxed as current income at 59 ½
-Mandatory distributions at age 72

Taxable brokerage
-Easily deposit money and buy and sell investments
-Penalty and restriction-free withdrawals
-No contribution limits
-No income limits
-Investors can withdraw their money at any time
-Investors do get taxed when they make money on funds and investments inside the account (like when they sell or earn dividends)
-Ideal for savings goals 5+ years out (like buying a home)
-Can compliment an emergency savings

Did that help? Do you have more questions? Leave them below!

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