A traditional IRA is a retirement account in which an individual can invest money for the future. It is held at a bank or a brokerage, and may offer different investment choices depending on where it is held. The advantage of a Traditional IRA is that most contributions are tax-deductible. Transactions within the account (capital gains, interest, dividends) are not taxed, but withdrawals are subject to federal income tax. There are limits on contribution amounts and the tax-deductibility of such contributions so be sure to refer to the IRS page below:
Much like Traditional IRAs, a Roth IRA is a retirement account in which an individual can invest money for the future. It is held at a bank or a brokerage, and may offer different investment choices depending on where it is held. However, the big difference is that the contributions are not tax-deductible. Instead the investment grows in your account tax-free and you won’t pay taxes on the distributions either. Again, there are restrictions on this type of account, so please refer to the IRS page below:
A 401k plan is offered by many employers as a benefit to their employees. The employee defers part of their salary, either as a percentage or a fixed amount per pay period. Instead of receiving the money now, it goes into the 401k plan and is not included in the employee’s taxable income.
Transactions within the account (capital gains, interest, dividends) are not taxed, but withdrawals are. Many employers help their employees by contributing to the 401k plan as well. Most commonly, they offer to match contributions up to a certain amount. They can choose to match dollar for dollar, or just a portion of what you contribute. For example, a company may offer to contribute half of what you put in, up to 6%.
Although 401k plans can be a great way to save for the future, there are some problems. Most plans restrict investments to a narrow range of investment choices (usually mutual funds and ETFs) which may carry significant fees. Your company should be able to provide you with information about your 401k plan, including eligibility requirements, investment choices, limits, fees, etc. You should also spend some time looking over the IRS page as well:
Unlike the other retirement accounts discussed, you can deposit and withdraw funds from a regular brokerage account at any time. This type of account usually offers a full range of investment choices and charges a fee per transaction. Taxes must be paid on capital gains, interest, and dividends. Most brokerages offer self-service access to market information and research. Investment advice from a professional advisor may be available from a full-service broker, but almost always at a high fee.
These are typical deposit accounts at a bank. They are insured by the FDIC and generally pay a small amount of interest. We don’t consider these to be investment accounts, but rather a place to safely store cash.