Far Too Many People...
"Sort Of" Understand... The Difference Between Retirement Savings Accounts And Non-Retirement Savings Accounts.

Let's make sure you are not one of those people.

So what is the difference between... retirement savings accounts and non-retirement savings accounts?

Simply put...

What differentiates a retirement account from a non-retirement account is simply... how the account is classified or tagged... with respect to the IRS.

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That is really all that it amounts to. It is merely a "classification" of the account.

It is not an "entity" in and of itself.

By establishing an account and defining what type of account it will be... you are informing the IRS to classify or tag this account either as a retirement savings account or a non-retirement savings account.

Accounts that are classified as retirement accounts (qualified accounts) are treated differently... in regard to taxation... than accounts that are classified as non-retirement accounts (non-qualified accounts).

Anywhere that you can establish a non-retirement savings or investment account... you can also establish a retirement savings or investment account.

Bank savings accounts, CD's, money market accounts, mutual funds, stock investments, bond investments, etc., etc. Any and all of these types of investments can be tagged as either a retirement account or a non-retirement account.

So... whether an account is a retirement account or a non-retirement account is totally dependent upon how it is identified to the IRS.

It's about how the account or investment is tagged.
It is not about what the account or investment is.

Now... lets consider the various different types of retirement savings accounts and how you can benefit by using more than one type.

Most of us are in a position to be able to have several types of retirement savings accounts.

And yet... many people have just one type of retirement account.

Some have just one type of account because... that is all that they can fund.

Others may have only one type of retirement account because... they simply are not aware of their options.

Or perhaps... they don't understand the options.

And some may simply not be aware of... the magnitude of the retirement challenge. And therefore are oblivious to... the urgency of the matter.

It is best to take advantage of all the different types of retirement savings accounts that are available to you.

Having multiple account types is one way to increase the total "contribution limit" for your retirement savings.

In addition... the use of multiple account types can expand your list of investment choices. Thereby providing for greater portfolio diversification and thus lower risk.

That said...

Let's consider the different types of retirement savings accounts.

There are basically two categories.

They are... Employer Sponsored Retirement Plans and Individual Retirement Accounts (IRA's).

Employer Sponsored Retirement Plans

Just as the name implies... employer sponsored retirement plans are tax qualified plans sponsored by the employer.

In other words... your employer makes the plan available.

There are a number of different types of employer sponsored retirement plans.

Here are the more common ones...

  • The 401k plan. Probably the most common of all.
  • The Savings Incentive Match Plans For Employees (SIMPLE).
    Often used by small companies and the self employed.
  • The Simplified Employee Pension plan (SEP).
  • Defined Contribution Pension Plan. Becoming rare in today's world.
  • Defined Benefit Pension Plan. Becoming rare in today's world.

    Sometimes the employer will contribute to the plan for the benefit of the employee. Sometimes they don't.

    Employer contributions can vary from company to company and from plan type to plan type.

    Individual Retirement Accounts

    Individual retirement accounts are tax qualified accounts that you as an individual set up on your own.

    These accounts have no connection whatsoever to your employer.

    There are basically two types of Individual Retirement Accounts.

    They are...

  • The Traditional IRA.
  • The Roth IRA.

    Both Traditional IRA's and/or Roth IRA's are funded entirely by the individual.

    Please be sure to click on the individual links for each type of account for a more detailed discussion on each.

    Let me conclude by saying that you should be taking advantage of all the types of retirement savings accounts that are available to you.

    Don't fall into the dangerous trap of thinking that... just because you have a 401k or... just because you have an IRA... that your retirement is set and you can relax and not worry.



    For most of us... utilizing all of the different types of retirement savings accounts that are available to us will not only better assure that we will reach our retirement goal but can also reduce the amount of risk we take in getting there.

    "Because It Matters"... Jim

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