What's a Retirement Account... and Why Should You Care?

You might be thinking: "I'm not even an adult yet... why do I need to know anything about a retirement account?"

Fair question, but the answer may surprise you. The fact is, learning the ins and outs of retirement accounts gives you knowledge that most adults still don't even have.

So, What’s a Retirement Account?

A retirement account is like a savings account, but it comes with a few twists:

1. The money grows faster. Retirement accounts place your money into assets like stocks and bonds, which typically outperform standard interest paid by normal savings accounts. That ensures your money grows fast enough to outpace inflation.

2. Taxes (or the lack thereof). Retirement accounts have specific tax benefits set up so you have to pay little or no taxes on the money inside of them (more on that later).

3. You can’t take it out early (unless you want a big penalty).

Ok, so what are my options?

Well, there are 3 main types of retirement accounts, each with their own rules. Let's break them down one by one:

A 401(k) is an account you get through your job. When you work for a company, they'll offer to take a portion of your pay check and put it into this account automatically. This money is then invested (into stocks, bonds, mutual funds, etc.) and can grow over time. The best part? Companies will often times match what you put into the account, sort of like a bonus that you can't access for a long time. However, there are limits. Companies typically only match money up to a certain amount. For this account, you pay taxes later, when you retire and start using the money.

An IRA (Individual Retirement Account) is like a 401(k) but you open it on your own rather than through your employer. With this account, you can still invest your money the same way, and it still grows over time. Similarly to the 401(k), it also has contribution limits (caps on how much money you can deposit), and you also pay taxes when you take the money out during retirement.

A Roth IRA (named after Senator William Roth who led the charge for the legislation that made the Roth IRA possible) works a little differently. The Roth IRA is especially great for young people because you pay taxes on your money before it goes into the account, not after. That might sound like a downside, but it means when you're older and you take the money out, you don’t pay any taxes at all. That means no tax on the money you put in, and no tax on the money it earned. That’s why financial experts say it’s one of the best deals for people who start early.

Final Thoughts

A retirement account is a best friend that uses investing & special tax rules to help your money grow faster and more efficiently. Something that surprises a lot of people? Some teen jobs (like babysitting) can qualify you to open a Roth IRA for kids. Remember, the earlier you start, the stronger it becomes, so what are you waiting for?

---

Do any of these options sound preferable to others? Let us know your take in the comments down below!