Any retirement savings account is set up the same way a standard savings account is. However, a retirement account is open for more sophisticated investment vehicles. What differentiates the two is that your money goes into a retirement savings account. Besides, there are employer packages as well as tax advantages you get to enjoy, and in return, your account is limited on when you can access and withdraw your money.
Here are some of the best retirement savings account you can consider:
Roth IRA
Roth IRA account is funded by after-tax income. It ensures your earnings grow tax-free, but the income determines whether you are eligible for contributions or not. Withdrawal of the original contributions tax is penalty-free any time, but before 59½ years of age, all withdrawals are subjected to tax and penalties. Contributions are allowed for any age with no requirements to make withdrawals.
Traditional IRA
The contributions made to this account is done after-tax income, and are subjected to tax deductions in the year they are made. If you make any withdrawal before 59½ years of age, you are taxed at an income tax rate and also subjected to a 10% early withdrawal penalty. You cannot add any more contributions after 70½ years of age, and you could also be asked to start taking the least distributions.
401(k)
Also known as an employer-sponsored retirement account, 401(k) provides for contributions up to $19,000 of the pre-tax income, and $25,000 for those aged 50 and above per annum. All contributions are subject to deductions from the paycheck and may be matched by the employer. Before 59½ years of age, any withdrawals are subjected to your current income tax rate in addition to a 10% penalty. Once you hit 70½ years, you are needed to start withdrawing the funds.
Retirement savings accounts provide a higher rate of interest than the regular savings accounts because their purpose is to enable you to save for your retirement. The moment you reach the retirement age, you can access all your money without any penalties.