How I Set Up My Retirement Fund Part 1: What the Hell Is A Retirement Fund

What is a retirement fund?

For us gen-zers, you may have overheard your grandparents or parents talk about their retirement accounts. Now, before you shake your head and say “boomer”, retirement funds are powerful tools that can help you become a millionaire and rest easy for when you are old enough to retire.

So, what is a retirement account? Without going into full-on finance nerd mode, think of a retirement account as a piggy bank with infinite space. You put money in, and it is kept safe. Over time, the money you put in the piggy bank begins to grow and double in monies. Then once you are 60 years old, you can crack it open and take all the money that’s inside. You can use it to vacation, go out to 5-star restaurants, or set your kids up for their future. Do whatever you want, it’s your money! Essentially, that’s a retirement account.

What are the different kinds?

Going full-on finance nerd mode, a retirement account is a tax-sheltered account. When you open a brokerage account, anything that you sell or any dividends received are taxable. Meaning you will pay for any taxable event in a brokerage account to the Internal Revenue Service (IRS). There are 4 common retirement accounts that I would like to discuss: Individual Retirement Arrangements (IRA), Roth IRAs, 401(k), and Roth 401(k) (1,2).

Traditional IRAs

An IRA is a retirement account that you set up individually through a platform such as a financial institution like Charles Schwab, a mutual fund like Vanguard, and a stockbroker like M1 Finance (1). There are rules and advantages to follow/understand when it comes to investing your money in an IRA.

The amount of contributions you put into an IRA can be used to deduct from your annual income. However, there are limits and rules for how much you can deduct. The rules change depending on whether your employer provides you with a retirement plan or not

If an employer does not provide a retirement plan, use this link to see how much you can deduct from your annual income (3)

Your Filing Status Is	Your Modified AGI Is	Therefore You Can do
single, head of household, or qualifying widow(er)	any amount	a full deduction up to the amount of your contribution limit.
married filing jointly or separately with a spouse who is not covered by a plan at work	any amount	a full deduction up to the amount of your contribution limit.
married filing jointly with a spouse who is covered by a plan at work	$218,000 or less	a full deduction up to the amount of your contribution limit.
married filing jointly with a spouse who is covered by a plan at work	more than $218,000 but less than $228,000	a partial deduction.
married filing jointly with a spouse who is covered by a plan at work	$228,000 or more	no deduction.
married filing separately with a spouse who is covered by a plan at work	less than $10,000	a partial deduction.
married filing separately with a spouse who is covered by a plan at work	$10,000 or more	no deduction.

If work or your employer does provide a retirement plan, then use this link to see how much you can deduct from your annual income (4)

Your Filing Status Is	Your Modified AGI Is	Therefore You Can do
single or head of household	$73,000 or less	a full deduction up to the amount of your contribution limit.
single or head of household	more than $73,000 but less than $83,000	a partial deduction.
single or head of household	$83,000 or more	no deduction.
married filing jointly or qualifying widow(er)	$116,000 or less	a full deduction up to the amount of your contribution limit.
married filing jointly or qualifying widow(er)	more than $116,000 but less than $136,000	a partial deduction.
married filing jointly or qualifying widow(er)	$136,000 or more	no deduction.
married filing separately	less than $10,000	a partial deduction.
married filing separately	$10,000 or more	no deduction.

A person may make withdraw or receive distributions from their IRA at the age of 59 ½. The money invested within an IRA grows tax-free, but the money is taxed at ordinary income when you make a withdrawal or receive a distribution from your IRA. Tax rates vary depending on your tax bracket and filing status (5).

Tax rate	Taxable income bracket: Single filers	Taxable income bracket: Married, filing jointly	Taxable income bracket: Married, filing separately	Taxable income bracket: Head of household
10%	$0 to $11,000	$0 to $22,000	$0 to $11,000	$0 to $15,700
12%	$11,001 to $44,725	$22,001 to $89,450	$11,001 to $44,725	$15,701 to $59,850
22%	$44,726 to $95,375	$89,451 to $190,750	$44,726 to $95,375	$59,851 to $95,350
24%	$95,376 to $182,100	$190,751 to $364,200	$95,376 to $182,100	$95,351 to $182,100
32%	$182,101 to $231,250	$364,201 to $462,500	$182,101 to $231,250	$182,101 to $231,250
35%	$231,251 to $578,125	$462,501 to $693,750	$231,251 to $346,875	$231,251 to $578,100
37%	>= $578,126	>= $693,751	>= $346,876	>= $578,101

There is a limit to how much you can deposit into an IRA but no salary limits (6)
1. An important note!!! For 2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs cannot be more than $6,500 under the age of 50, or not more than $7,500 if you are above the age of 50 (6).
2. If you are under the age of 50, you may contribute $6,500 each year to your IRA (6)
3. If you are over the age of 50, you can contribute $7,500 each year to your IRA (6)

Roth IRAs

Similar to the traditional IRA, a Roth IRA is a super powerful tool for retirement, but better. You can open an account with a financial institution like Charles Schwab, a mutual fund like Vanguard, and a stockbroker like M1 Finance (1). There are rules and advantages to following/understanding when it comes to investing your money in a Roth IRA is different compared to the traditional IRA.

The most important rule when investing in a Roth IRA is dealing with income limitations. Unlike a traditional IRA which has no restriction when it comes to income, if you are single and make more than $153,00 a year you cannot make any contributions to a Roth IRA. If you are married and make more than $228,000 you cannot make any contributions to a Roth IRA. The table below explores more options (7).

Your filing status is	Your modified AGI is	Therefore you can contribute
married filing jointly or qualifying widow(er)	< $218,000	up to the limit
married filing jointly or qualifying widow(er)	> $218,000 but < $228,000	a reduced amount
married filing jointly or qualifying widow(er)	> $228,000	zero
married filing separately and you lived with your spouse at any time during the year	< $10,000	a reduced amount
married filing separately and you lived with your spouse at any time during the year	> $10,000	zero
single, head of household, or married filing separately and you did not live with your spouse at any time during the year	< $138,000	up to the limit
single, head of household, or married filing separately and you did not live with your spouse at any time during the year	> $138,000 but < $153,000	a reduced amount
single, head of household, or married filing separately and you did not live with your spouse at any time during the year	> $153,000	zero

The sad part about investing in a Roth IRA is that you cannot use your contributions to your Roth IRA as deductions to lower your annual income (8).
The best part, and why the tool is so powerful, is that your contributions grow tax-free and your withdrawals are also tax-free! That means if you have a 2 million dollar Roth IRA, you and withdraw from it tax-free if you meet all requirements listed by the IRA. Check out source 9 and CTRL+F Roth IRA to learn more (in the middle of the page) (8,9)
1. This is because you put money in Roth IRA has already been taxed
You can contribute to your Roth IRA after you reach 70 ½ (8)
There are no required minimum distributions
You can contribute to your Roth IRA as long as you have an income (2,8,9)
As long as you live, you may keep the money in your Roth IRA (8,9)

Traditional 401(k) Plan

401(k) plans are different compared to the traditional IRA and Roth IRA. A traditional 401(k) plan is a retirement account offered by your employers (10,11). When you work for a company, they offer you a 401(k) plan that is managed by a company like Vanguard or Fidelity, and you agree to contribute a percentage of your salary to the plan (11). Typically, a good employer will match a certain percentage, say 3 or 6%, of what you invest into your 401 (k). If your employer has a match, please take advantage of this as it is free money as long as you stay with the company (which is the catch). The traditional 401(k) plan is similar to the traditional al IRA retirement account. As with the traditional and Roth IRA, there are rules and conditions to be aware of.

Money contributed to a 401(k) can be used to deduct from your annual income (13)
There are limitations to how much you can invest in a 401(k) plan.
1. For 2023, you can invest up to $22,500 if you are under the age of 50, and invest up to $30,000 if you are over the age of 50 (10,11)

As with a traditional IRA, a person may make withdraw or receive distributions from their 401(k) at the age of 59 ½. The money invested within a 401(k) grows tax-free, but the money is taxed at ordinary income when you make a withdrawal or receive a distribution from your 401(k). Tax rates vary depending on your tax bracket and filing status (5,11).

Tax rate	Taxable income bracket: Single filers	Taxable income bracket: Married, filing jointly	Taxable income bracket: Married, filing separately	Taxable income bracket: Head of household
10%	$0 to $11,000	$0 to $22,000	$0 to $11,000	$0 to $15,700
12%	$11,001 to $44,725	$22,001 to $89,450	$11,001 to $44,725	$15,701 to $59,850
22%	$44,726 to $95,375	$89,451 to $190,750	$44,726 to $95,375	$59,851 to $95,350
24%	$95,376 to $182,100	$190,751 to $364,200	$95,376 to $182,100	$95,351 to $182,100
32%	$182,101 to $231,250	$364,201 to $462,500	$182,101 to $231,250	$182,101 to $231,250
35%	$231,251 to $578,125	$462,501 to $693,750	$231,251 to $346,875	$231,251 to $578,100
37%	>= $578,126	>= $693,751	>= $346,876	>= $578,101

401(k) are subject to required minimum distributions starting at the age of 73 (10,11)
You can contribute both a traditional 401(k) and a Roth 401(k) plan but only till the limit of $22,500 if you are under the age of 50, and invest up to $30,000 if you are over the age of 50 (10,11)

Roth 401(k) Plan

A Roth 401(k) retirement account, the sister to the traditional 401(k), is very similar to a Roth IRA, with the most significant difference being you can invest more! A Roth 401(k) plan is a retirement account offered by your employers (10,12). When you work for a company, they offer you a Roth 401(k) plan that is managed by a company like Vanguard or Fidelity, and you agree to contribute a percentage of your salary to the plan (12). Typically, a good employer will match a certain percentage, say 3 or 6%, of what you invest into your Roth 401(k). If your employer has a match, please take advantage of this as it is free money as long as you stay with the company (which is the catch). There are rules and conditions to be aware of.

The best part about investing in a Roth 401(k) is your account grows tax-free, but even better, you are not taxed when you make a qualified withdrawal! Roth retirement accounts are powerful! However, to avoid penalties and taxes, the withdrawals must be qualified, so check out sources 9 and 15 and CTRL+F Roth 401(k) to learn more (9,15)
The sad part about investing in a Roth 401(k) is that you cannot use your contributions to your Roth 401(k) as deductions to lower your annual income (12,13).
You can contribute both a traditional 401(k) and a Roth 401(k) plan but only till the limit of $22,500 if you are under the age of 50, and invest up to $30,000 if you are over the age of 50 (10,11)
1. For 2023, you can invest up to $22,500 if you are under the age of 50, and invest up to $30,000 if you are over the age of 50 (10,11)
If you own a Roth 401(k), you must hold it for 5 years to access the monies (14)
By the time you are 73, you have to take your first required minimum distribution (14,16)