Tax codes are written by numbers nerds. Nerds love codes and abbreviations. So let me translate money nerd for you. Put your glasses on and push them up your nose as you gain all the knowledge.
401k – named after the section of the Internal Revenue Code (IRC) that outlines the rules for this type of plan, specifically section 401(k). Yup, you’re quoting tax code without even knowing how smart you are. There are often two options: ROTH – using after tax income or standard which takes money out before it’s taxed. Often an employer will offer a match up to a certain amount. That’s an awesome benefit because it doubles your money right off the bat. Start your retirement here, preferably with a ROTH option (see below).
Your employer will choose the options you have for investing your money. Choose the funds that speak to you. Just DO NOT leave it in a money market account. Make sure it’s actually invested in something… anything is better than nothing. So if you’re having analysis paralysis, just start and adjust later.
2025 limits: the 401(k) contribution limit for those under 50 is $23,500
Roth – named after a U.S. Senator from Delaware. It is an option that allows you to grow your money TAX-FREE!!!! That means if you have $500k in a Roth account, you can access that without paying any taxes after 59.5 years old. Still a spring chicken, really. This type of account does not have mandatory withdrawals because the government doesn’t have a hand out for the taxes.
Roth eligibility for 2025: if you make $150k as a single person/filing separately or $236k married filing jointly. Click for details.
403(b) – names after the tax code section. This is similar to a 401k, but it’s for public school teachers and employees of some charities.
TSP – this is a retirement fund for service members. It’s a Thrift Savings Plan. Sounds like coupon cutting, but it’s not. Here’s a great resource for you if you are in the military. https://www.tsp.gov/
IRA – individual retirement account. This means that you are setting it up on your own. This can be standard or Roth (see above). This can be set up through a firm such as Schwab, Vanguard or Fidelity. In the age of the internet, this is easy peasy. I put it off forever, but then realized it was really pretty basic. IRAs give you the most flexibility in your investments. You get to pick the funds. Don’t try to time the market, just get started now. BTW, some people pronounce this with initials I R A and some people pronounce it as a word… Ira. No matter how you pronounce it, set yours up pronto.
Limits for 2025: $7,000 per person per year . Click for details.
SEP IRA – Simplified Employee Pension Individual Retirement Account – ha, simple. If you own a business or are self-employed, you don’t have anyone to open a 401k with. This is your alternative. Because you are doing both sides of the contribution (employee + employer), your limits are higher. The contribution is tax-deductible and the growth is tax-deferred (you pay it when you withdraw).
2025 limits: 25% of income with a max of $70k.
How much should I contribute?
As a rule of thumb, it’s best to contribute 15% of your gross income to retirement. What if 15% exceeds the allowable contributions? That’s when you’d open a regular investment account through a low-fee place like Schwab, Fidelity or Vanguard. No, you don’t get the tax benefits, but it sure makes retirement a bit more cushy and there are no rules about withdrawals.
If you’re feeling confused about any of this, feel free to set up a consultation for money coaching. I’m not a broker or financial advisor, but I can point you in the right direction and answer your questions.
Other FAQs:
Should I take a loan on my retirement?
No! Any withdrawals before 59.5 years old are taxed (your income rate) and penalized (10%). So unless it is a desperate situation (I mean like you are about to lose your home), don’t even consider it. And definitely speak to a tax/investment professional (not anyone who stand to benefit from this loan). Do not ask your friends. Do not check TikTok. Leave it alone.
Do I need an investment advisor to open retirement accounts?
No! It can be 100% DIY. If you must hire an advisor, choose a flat-fee professional. That 1% is chump change now, but it really steals from your nest egg. I love Rob Berger’s article on this.
If I’m still paying off debt, should I be investing?
I have mixed feelings about this. I believe if you can pay off your debt within 2 years, you should absolutely pause your contributions. That’s what we did. Maybe that pushes off retirement goals by 2 years, but it meant we could allocate every penny to being debt-free! If you are uncomfortable stopping all investments, maybe just stick with your employer match and throw the rest on your snowball.
Hey friend! I’m not a licensed financial advisor, attorney or accountant – just someone who loves learning and sharing about money stuff. Everything I post is based on my own personal experiences and opinions. Please don’t take it as professional advice. If you’re making big money moves (go you!) it’s best to consult with a licensed professional and do additional research. I’m just here to provide useful ideas in a comfortable way.
Cheers! Leslie