Money on the Brain: Find a retirement account that is best for you and start contributing

In my last column, I encouraged you to start a retirement account, even if you will get a pension. A retirement account will give you extra financial security and freedom.

Starting a retirement account can be confusing and intimidating, however. There are quite a few options. Which type of account are you eligible for and which type should you open?

The most common and popular retirement accounts include the 401(k), IRA, 403(b), and 457 plans. “IRA” stands for “Individual Retirement Account.” The numbers in the other types of accounts refer to the section of the IRS tax code that details that particular plan.

If you start one of these accounts, you’ll be able to choose between the traditional plan and the “Roth” plan.

With traditional plans, you’re not taxed until you withdraw money from the account. Your contributions are made pre-tax. A Roth account is the opposite. You pay taxes on the amount you contribute, but then you are allowed to withdraw funds tax-free in most situations.

More:Money on the brain: Even those with pensions should invest in a retirement account

Both the traditional and the Roth retirement accounts have their advantages, but the older I get, the more I wish I had started a Roth IRA when I was younger. The main reason is, as long as you meet certain conditions, you don’t have to pay taxes when you withdraw from a Roth IRA.

Since I can’t go back in time and open a Roth IRA when I was 25, I did the next best thing a few years ago. I stopped contributing to my traditional IRA and opened a Roth IRA. It gives me peace of mind to know that even if tax rates go up in the future, it won’t affect my Roth IRA.

As you might expect, there are laws, regulations, loopholes and exceptions for all of these plans.

For example, most plans have a contribution limit. According to www.irs.gov, you can contribute $6,000 to an IRA, or $19,500 to a 401(k), 403(b), or 457 plan in 2021.

Some plans allow you to make “catch-up contributions” if you are at least 50 years old. This means you can contribute more than the annual limit.

Before you try to open a particular type of retirement account, make sure you are eligible for the one you choose. Anyone with earned income can open an IRA.

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A 401(k) is an employer-sponsored plan. If your company doesn’t offer a 401(k), you may be out of luck. It is possible to start a 401(k) if you are self-employed, however.

If you want to open a 403(b) plan, you’ll need to work for a public school, church, or certain charities. To start a 457 plan, you must work for a state or local government, or certain tax-exempt organizations.

Teachers in Illinois will have a new option for saving for retirement starting this January. This voluntary plan will be called the “Supplemental Savings Plan.” It will be administered by Voya Financial and is a 457(b)-style plan. Any active employee in Illinois’ Teacher Retirement System can participate.

If you don’t have a lot of money to invest each month, that’s OK. Almost any amount of money will make a difference in the long term, as long as you are consistent.

What if you can only invest $100 per month? That can add up. According to Bankrate.com, if your investment earns 8%, you’ll have $35,189 after 15 years. That’s not a ton of money in retirement, but remember, this is money you’re saving on the side to supplement your pension.

And if you increase your investment to $200 per month? Then you’ll have $70,378 in 15 years. If you went ahead and saved the maximum for an IRA ($500/month), you’d have $175,946 after 15 years.

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Think how much better you’d sleep at night in retirement if you knew that in addition to your pension, you had $175,946 in the bank.

Starting a retirement account, even if you’ll get a pension, is a smart way to take a bit more control of your finances after you retire. 

If you’re not sure which plan is right for you, do some research on the internet or talk to a financial adviser. Then open an account and start investing. Once your retirement starts, you’ll be glad you did.

Dave Kinzer is a music teacher and a financial coach in Springfield. Contact him at www.davekinzer.com. His column will appear here every other Wednesday.