RP - 401Ks and Roth IRAs Lesson
401Ks and Roth IRAs
Introduction
When people think of retirement, they may picture someone on the beach enjoying the sun, or an older couple who now has time to travel the world. It sounds so relaxing and luxurious! However, there is a lot of planning that is required in order to retire. How much money will you need to have saved up? Do you want enough money to just have the basics or retire with extra money available to spend? Planning for retirement is also important so that you do not have to rely on friends or family to support you as you grow older. After years and years of working, you’ll want to be able to sit back and enjoy your retirement!
Retirement Account Options
To live well in retirement, you no longer can rely solely on a company pension plan or Social Security. Instead, you will have to depend on how skillfully you plan and invest, and whether you make good use of tax-advantaged savings plans such as 401Ks and Roth IRAs.
Contributing part of your salary to a 401(k) gives you three compelling benefits:
- You get an immediate tax break because contributions come out of your paycheck before taxes are withheld, which lowers your taxable income.
- The possibility of a matching contribution from your employer. Many companies put their own money into your account as a company perk.
- You get tax-deferred growth -- meaning you don't pay taxes each year on capital gains, dividends, and other distributions.
How Much Will You Need?
Although there are a lot of factors that go into a solid retirement plan, one rule of thumb and a good place to start is that you'll need 80% of your annual pre-retirement income to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when it comes time for you to retire. Explore the example in the interactive below and try the practice questions that follow.
Using Future and Present Value Formulas
Regular contributions to a retirement account are usually necessary in order to save the amount needed to retire. This changes the formula that was used for future value and present value just a bit. Click through the interactive activity, or read the transcript below, to find out more about contributing to a retirement fund.
Click here to view the transcript of the above interactive activity. Links to an external site.
Retirement Accounts Practice
Click on the arrow on the bottom right to move through the practice activity.
Start Saving Now!
Many people wait too long to start saving. The earlier you start saving, the more time your money has to grow! Click to see the difference in savings depending on the scenario. Try to figure them out before clicking for extra practice.
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