Alphabet Soup 101

Most of the questions I collected in the Q&A box during December had to do with investment options, especially with regard to retirement. In our Relief Society meeting last month, we got to go over some of the ins and outs of those plans, but for this week on the blog, I'm going to go ahead and summarize the basics again. This is a pretty simplified version, it's easier to remember everything when you start with a basic framework. After you are familiar with the basics, you can go on and learn more (please do!). The glossary pages of the packet from the RS meeting is the next step. You CAN understand this! Here goes...

Most employers offer some kind of plan for their employees to save for retirement. The most common one you hear about is called a   401(k) plan. If you work for a nonprofit or government-based entity, you may have something that is very similar to a 401(k), but it's called a 403(b). If you are self-employed or work for a small business, you may have a SEP-IRA. Outside of your employer, you as an individual can set up your own additional retirement accounts. These are called IRAs (individual reitrement accounts).

There are lots of federal regulations about how these plans can be handled. Your employer is required to give you a description of the rules they follow for your plan. It is called a Summary Plan Description (SPD). Go to your SPD and read about the details of your plan. Here are some of the things you'll want to look for:

• Can you put money into your retirement account pre-tax or after-tax? If it's pre-tax, you get to put money away from your income before you pay taxes on your income, so you will actually have LESS income to be taxed on (which means a lower tax bill!).
• The money you put away may be tax-deferred. Basically, you won't pay any taxes on it until you take it out. This usually happens when you didn't have to pay taxes on the front end (pre-tax).
• A ROTH contribution means you put money into your account with after-tax money, but then you won't have to pay any taxes on it when you take it out. The advantage of these is that it means you're not paying taxes on any of the additional money your account has earned over the years. So while you take a hit paying taxes now, you won't have to again. ROTH IRAs are pretty common for individuals, and ROTH 401(k)s are getting to be more common.
• Different accounts have different limits. That means how much money you're allowed to put in the account each year. Usually, you're allowed to put more into employer 401(k) and 403(b) plans than you can into your own IRA.
• Matching means your employer offers some kind of plan where they add money to your retirement account based on the amount you put in (a ratio). This is a great deal! Maximize your contributions to maximize the amount of extra money added to your account at no additional expense to you!
• Withdrawals. Basically, figure out when your plan allows you to take money back out. Some plans let you take a hardship withdrawal early if you need the money, but you pay some kind of penalty in order to do it. All plans will have an age at which you can start pulling the money back out without penalty.

Hopefully, this helps! Now our quick trivia question for this week.... do you know why the accounts are called 401(k) and 403(b)? Leave a comment if you do!