Step 1 To Retirement & Financial Freedom: Traditional Retirement Accounts

So you have the 3-6 months worth of expenses saved and have enough monthly income to cover your expenses like the experts say to have, awesome!

Now what?

Now we start investing into those retirement accounts that are easily accessible to nearly everyone!

Few of us are fortunate enough to have well funded pensions these days and even if you are one of the lucky few, it’s still beneficial to use these traditional retirement accounts.

The main accounts that I plan to leverage are a 401(k) and an IRA. Overall, both are very similar and offer options for almost all risk tolerances.

The main differences are that the contribution limit is substantially higher for 401k(s) and employers have the ability to match contributions.

By maxing out both of these accounts on a regular basis throughout our working years, we will have no problem retiring a millionaire in our 50s or 60s (assuming we’re all millennial here).

Not bad!

Even if you can’t max both of these accounts out, or even one of them, making any sort of contribution will make a huge difference down the road!

How I’m pursuing this step and recommend others do the same is contributing as much of my free cash flow as possible to a 401(k) until I meet the yearly contribution limit.

I’m so close to hitting this btw!

Once I’ve hit the 401(k) contribution limit, I’ll open an IRA account and contribute any remaining free cash flow to it until I’ve met the yearly contribution limit for that!

I know that’s all pretty high level so if anyone is still reading and wants to dive into the details of both 401(k)s and IRAs, feel free to keep on reading!

401(k)

  • $18,500 annual contribution limit (as of 2018)
  • Money cannot be withdrawaled until you are 59.5 years old (early withdrawals are taxed at 10% without a qualifying hardship penalty)
  • Money must begin being withdrawaled by the time you are 70.5 years old
  • Generally invested in a mix of stocks and bonds
  • Companies often match up to a certain percentage of your contribution

Check out the figures below to see just how powerful maxing out a 401(k) can be! There’s a few assumptions to the chart (below) but you get the idea!

IRA (Individual Retirement Account)

  • $5,500 annual contribution limit (as of 2018)
  • There are some circumstances that allow you to withdraw money prior to turning 59.5 years old (read here for more info on that)
  • Money must begin being withdrawaled by the time you are 70.5 years old
  • You can select your investments but funds are generally invested in a mix of stocks and bonds
  • These are perfect vehicles for retirement investments because of the growth opportunity and tax advantages they offer!

Just to make it more confusing, there are 2 main types of 401(k)s and IRAs:

Traditional: You contribute pre-tax dollars (aka lowers your taxable income for the year) and that money grows tax free until you begin making withdrawals in retirement

ROTH: You contribute post-tax dollars (aka your taxable income is not lowered) but that money grows tax free and can be withdraws tax free

Whether to use Traditional or Roth accounts is an ongoing debate.

However, for MOST people, it won’t make a significant difference either way and the important thing is to begin investing in them right away!

Check out the figures below to see just how powerful maxing or an IRA can be!

That’s it!

We just have to invest in these 2 accounts and we’ll be set! If that’s satisfying and more than enough investing for you, great!

If that’s too easy or you have your sights set on even more investment opportunities and seeking to retire early or rich, stay tuned for next post with step 2: Non-Traditional Retirement Accounts!

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