Alphabet Soup: Retirement Accounts

Alphabet Soup

Personal finance is difficult enough as it is, but then throw in a bunch of acronyms, odd terms, and number-letter combinations and you have no idea what anyone is talking about when it comes to your investments, retirement, and future.

We want to give you a list of a few acronyms and their meanings so that you have a little bit of a better understanding when it comes to all of these fancy words people are throwing around; today, we are going to focus retirement accounts.

IRA – When it comes to retirement, IRA doesn’t stand for Irish Republican Army, but is instead of Individual Retirement Account/Annuity. An IRA is a retirement account that you open independently through an investment company. Individuals can save $5,500/year into one of these babies (subject to a few tax rules that you can read here), and if you are over age 50, you can save an extra $1,000.

A traditional IRA is tax deferred (you don’t pay taxes on the incomes you use for contributions this year, and must pay taxes on both contributions and earnings when you take money from the account) and a Roth IRA is not tax deferred (you pay taxes on the income you use to make contributions this year, and taxes are not due when money is withdrawn on both contributions and earnings).

myRA – This is a new one that you may hear pronounced as either Myra (like the name) or My-R-A; the “RA” again stands for retirement account. The myRA was first described in President Obama’s Address to the Nation in early 2014. The myRA is for individuals who do not have a retirement plan available through their employer; contributions are made to the account through direct deposit from the individual’s paycheck. The account follows the same contribution and taxation rules as a Roth IRA, but the account can only be used until the balance reaches $15,000 (including both contributions and earnings) or the account has been opened for 30 years, whichever comes first.

Maybe the most important thing to note about the myRA is that contributions can only made to a fund consisting of Treasury Bonds (much like the G Fund for those of you who know the TSP).

401(k), 403(b), 457 – Retirement accounts sponsored by a company or government organization for its employees. The letter-number combinations refer to the section of the IRS code that created these specific types of accounts. Through their paycheck, individuals can save a maximum of $18,000 (plus $6,000 if over age 50) pre-tax (similar to a traditional IRA).

These accounts are basically the same, with a few specific nuances that you can delve into further detail here, but the basic difference between them is that 401(k)’s are offered by private companies, 403(b)’s are operated by non-profits, school systems, and hospitals, and 457 plans are sponsored by local and state governments (including school systems) and the federal government (the TSP – or Thrift Savings Plan – is the federal government’s 457 plan).

Your employer may offer a matching contribution to encourage you to save into the plan, but it is not mandatory, and it is up to them to decide the how the match works (a match of 50% of all contributions up to 6% of salary or a 100% match of all contributions up to 3% of salary seem to be popular – or you can be complicated, like the federal government).

Now, the one note I absolutely have to make when it comes to contributing to these accounts is that annual contributions to all IRA accounts (including the myRA) are cumulative. This means that if you were to contribute to one or more of these accounts, you can only contribute a total of $5,500 (in 2015, $6,500 if over age 50). This only applies to IRA accounts and not to employer provided accounts (401(k), 403(b), etc.)

Wasn’t that taste of Retirement Account Alphabet Soup great? I know that you had so much fun that you can’t wait to check us out next week when we go through some acronyms that the financial professionals use!