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Retirement accounts and Investment accounts allow people to get the best of both worlds when investing for their future. Both retirement and investment accounts exist to help investors save for retirement. There are some key differences between the two that are important to know.
Retirement Accounts are tax-deferred investment vessels designed by the Internal Revenue Service (IRS) to help you better save for retirement. The three most commonly used retirement accounts are IRAs, ROTH IRAs, and 401(k)s. These different vessels allow you to save money more efficiently for retirement using a strategy called tax-deferment. Tax-deferment allows years of investment savings and income to compound on a tax-free basis. So, what’s the difference between the three?
IRAs, 401(k)s, and ROTHs
An IRA and 401(k) are two very similar accounts that follow much of the same rules. Both an IRA and 401(k) allow the investor to invest money tax-deferred until they are ready to withdraw in retirement. In other words, you are not immediately taxed for the money you put into an IRA or 401(k). Instead, all of the money and income you earn in traditional retirement accounts are only taxed when you make withdraws.
The Roth IRA is unique in how it allows you to save for retirement. In a Roth IRA, you are taxed for any money that you deposit into your investment account. However, when you go to withdraw money in your retirement, any income you have earned is tax-free.
Rules To Follow
It is important to realize that retirement accounts have many rules and constraints that need to be followed. Withdrawals for a these accounts may occur anywhere between the ages of 59.5 to 70.5. The time and amounts of your withdrawals are unique to every investors’ personal financial situation.
Typical investment accounts can also be used to save for retirement. It might be helpful to have a simple investment account that you can use for early withdrawals if need be. Whether it be for an early vocation or an unforeseen medical situation, utilizing an investment account has its benefits as well. We suggest that you consult with a professional financial planner about retirement and investment accounts to see what mix of the two fits your financial needs best.