As a former pension actuary, retirement saving is one of my favorite personal finance topics. I’ve written several posts on 401(k) vs IRA, and today I’ll be talking about the history of these retirement saving plans and making some observations about how the history affects the current retirement saving pictures.
Hopefully I have given you enough tease to get you curious about the tax advantages of a retirement savings account. I recommend you peruse these introductory posts to gain a basic understanding of retirement saving before reading this number-heavy post.
Chances are you have heard about the tax advantages of a 401(k) or IRA somewhere before. Let me sum up and illustrate in an easy-to-understand way, and as always, I’m available to answer questions.
Let’s clarify this first: retirement savings accounts have tax advantages over what?
Like a 401(k), an IRA is a retirement savings account. You put money in it, and use that money to invest. But unlike a 401(k), an IRA does not have an employment requirement. IRA stands for Individual Retirement Account; anyone, even if he is not employed, can contribute to an IRA unless his income is too high. This works perfectly for freelancers such as my friends that are dancers and do not work for any particular company.
I’m sure you have heard of these terms before. They probably appear on the media more frequently than the Kardashians. Traditional 401(k), Roth 401(k), Traditional IRA, and Roth IRA are 4 types of retirement savings accounts.