BUDGETING AND SAVING
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Before you go
A jargon-free look at
Retirement accounts have such strange names, like 401(k) and 457(b), you’d think they were made for robots, not people. And who or what exactly is a Roth? For some, the jargon alone can be enough to put off opening an account. But living well in retirement is important, so let’s break down the basics to give you a solid foundation to build on. (If you’re curious, the strange account names come from the tax code, and William Roth was a Delaware senator who championed a new type of retirement plan.)
Most retirement accounts fall into two categories: those offered through your workplace and those you open yourself.
Retirement savings plans from your workplace
If your benefits include a retirement plan, that’s a big advantage. Employers usually cover plan fees, and many also match part of what you put in.
Private companies
The employer-sponsored 401(k) is the most popular retirement plan, whether it’s a traditional or Roth. If you work for or own a smaller business, there are alternatives to help you save.
- Traditional 401(k): Contributions are made before taxes, which lowers your current taxable income. When you retire, you’ll pay tax on your 401(k) withdrawals.
- Roth 401(k): Contributions are made after taxes. Then in retirement, your withdrawals are generally tax-free.
- SIMPLE IRA and SIMPLE 401(k): A retirement plan designed for companies with fewer than 100 employees. They’re easier to administer but have lower contribution limits than a standard 401(k).
- SEP IRA (Simplified Employee Pension): Typically for self-employed individuals or small business owners.
Government and nonprofits
The employer-sponsored 401(k) is the most popular retirement plan , whether it’s a traditional or Roth. If you work for or own a smaller business, there are alternatives to help you save.
- 403(b): This is the nonprofit’s 401(k), offered in a traditional or Roth format.
- 457(b): Offered by many state and local governments, this plan has a unique feature that often lets you withdraw funds without penalty if you leave the job, even before age 59½.
- Thrift Savings Plan: The federal government’s version of a 401(k), available to federal employees and members of the uniformed services.
Retirement accounts you open yourself
If your employer doesn’t offer a plan—or you’d like to save more—you can open an account on your own.
- Traditional IRA: Contributions may be tax-deductible; withdrawals in retirement are taxed.
- Roth IRA: Contributions are with after-tax dollars; qualified withdrawals are tax-free.
- Spousal IRA: A working spouse contributes to this plan on behalf of their non-working spouse.
- Solo 401(k): This option for self-employed individuals offers higher contribution limits than an IRA.
- Health savings account: While not officially a retirement savings account, an HSA is a powerful savings tool. You’ll need a high-deductible health plan to open an account and enjoy triple tax savings—your contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. Check out our PerfectHealth Savings account to learn more.
You don’t need to memorize every plan to start saving for retirement.
Focus on the plan available to you, contribute what you can—especially if your employer matches—and let time and compounding do the heavy lifting. The most important step is simply to begin. Visit Flagstar Wealth Services to learn more and schedule a complimentary appointment.
