What the hell are the differences in retirement accounts?

Money bag with contract and pen neon sign

What the hell are the differences in retirement accounts?

After my back gave out in 2013 one thing led to another and I ended up working in the finance realm for a few. I learned what sales really means, how to do it and I also learned there are more ways to invest your money than the basic tools you always hear about when you walk into the bank. I also got the privilege learning from both sides of the isle, the Dave Ramsey (if you don’t know how he is good) and then the other side of the isle that believes in leveraging and creating wealth.

This schooling allowed me to form my own grand opinion about how to manage your business as an artist and it also made me appreciate different aspects of each system.

Traditionally, credit card debt is a no go and buying a long term house and paying it off early is a solid financial plan. While I do think there is value in the correct way to save, I have seen too many get stuck in this low risk thinking and avoid moving past it. The only way to create real wealth is to grow past the point of responsibility. The traditional way gives you a good foundation and solid habits. So, that is what we are going to focus on today. I don’t want to overload you or myself so, I’ll follow this up with a part 2. Here we go:

401K

A retirement account that gains compound interest (see here), Special thing about this account is you can only get one if you work for a company that offers one. The employer provides the account set up and usually gives you the, same amount you put into it usually up to 6%.

Money goes in to the account before taxes making the amount you owe to. The government less.

The Catch

When you get to the age (usually 59 1/2) you can start getting your money out without a real high penalty in the form of interest, you pay taxes on it. this is great, but it’s also a trap because now you are paying interest on all the money you accrued over time. So, instead of paying money when it’s a seed you pay when it’s a tree,

Positive Stuff:

It helps you in the now and grows at a small but steady rate. Since this is tied Into the index there is some risk, but you have the option to minimize it if you so wish.


ROTH IRA

This money goes into an account after you pay taxes. The cool thing about this one is when you go to pull it out later you can avoid the risk of paying the current tax rate. If you are pulling 3k a month out, you get that number.

Same age rules apply.

This account you can get whenever and as long as you are 18 or have a parental you can open one,

Downfall is you can only put in $6000 per year, so if you are using this in your small business as your primary retirement saving, you won’t have nearly enough money. You will need another account. Unlike the 401k you are solely responsible for funding this and paying attention to its growth.

TRADITIONAL IRA

This is a tax deductible retirement account. Like a Roth IRA the maximum amount you can deposit is $6000 per year. (just went up as of 2019)

It earns compound interest just like the rest of the retirement accounts (to see what compound interest is click here) The difference is, when you take the money out (after 55 1/2) you pay taxes, at the current tax rate, on that money. So, in 25 years if the tax rate is 80%, thats how much the government takes.

If you are over 50 you can put an extra $1000 in your account. It’s the governments way of saying, sorry your wayyyyyy behind, we can throw you a tiny sliver of a bone.

SEP IRA

This one is for self-employed people. All the same rules apply for the most part except you can insert 55k a year allowing you to actually be able to save like a W2 employee for a big company.

WHOLE LIFE INSURANCE

This one gets a shit load of bad press. The reason for this is the agents who have the best whole life insurance to offer work for a mutual company. Traditionally whoever sets you up with your investment accounts get a percentage of what you earn for helping you. Forever as long as you are with them. The big bad agents that have the best life insurance get paid up front and then only get a very tiny portion that comes from the insurance company when you renew your policy, this goes away and diminishes after a few years. This is call front load fees. Personally, I Care about 3 things with choosing a place to park my money.

  1. How much interest will I get

  2. Do I pay fees when I need to access it’ll, because life and self employment

  3. How accessible is the money I’m parking

For a person with commitment issues, the thought of leaving my money in an account that I can’t touch unless I want to pay 10% until I am 55 gives me actual heart palpitations. The reason that financial advisors for big firms shit on life insurance is because they can’t sell the best stuff and the majority of life agents are idiots. That being said, it’s a not hard to find a good one who can even open you up a traditional retirement account too.

What I LOVE about whole life for our industry is that you get a higher interest rate and it’s secure because you are getting dividends from the profits of the insurance company, not the stock market. Putting a safety net around your funds

You can pull money out whenever you damn well want

There’s a death benefit so your future or current kids can go to college if you happen to die.

It lasts your whole damn life.

This type of savings saved me when I woke up and couldn't walk.

PENSIONS

What police, fire fires and some lucky corporate employees still. Have. This is provided by a life company, your employer puts money into an account for you and then when you retire you get monthly checks and a death benefit Beasley it’s a life insurance.  

THE BOTTOM LINE

Get a retirement account.

ALSO

Save and invest in other things. These accounts aren’t meant to be your ONLY assets.