Investing · Module 6 of 11
The account with a tax break
Retirement accounts with tax breaks, free money from an employer match, and paying tax now or later.
Key terms in The account with a tax break
- 401(k) plan
A 401(k) plan is a United States employer-sponsored retirement plan that lets employees direct part of their pay into an individual account. Contributions are made through payroll deductions, and in a traditional plan they are excluded from taxable income until withdrawn. Employee contributions are always fully owned by the worker, while employer additions may follow a vesting schedule.
Source: Internal Revenue Service, 401(k) Resource guide plan: Participants 401(k) plan overview
- Employer matching contribution
An employer matching contribution is money an employer adds to a worker's retirement account in response to the worker's own contributions from salary. The plan document sets the formula, which commonly ties the match to a percentage of pay. Matching dollars grow inside the plan and are generally taxed when withdrawn, and they do not reduce the employee's own limit.
Source: Internal Revenue Service, Matching contributions help you save more for retirement
- Traditional IRA
A traditional IRA is a United States individual retirement arrangement with two main tax features. Contributions may be fully or partly deductible depending on filing status and income, and earnings are not taxed until money is withdrawn. Because tax is deferred rather than removed, withdrawals are generally counted as taxable income.
- Roth IRA
A Roth IRA is a United States individual retirement account that follows most traditional IRA rules but treats taxes the opposite way. Contributions are not deductible, and qualified withdrawals are free of federal income tax. Eligibility to contribute depends on filing status and income, and the owner is not required to take distributions during life.
Every term on Lever is in the money glossary.
About this module
The account with a tax break is part of Investing, one of 15 subjects in Lever. It’s a short run of 5 lessons, about 13 minutes in all, so you can finish it in one sitting.
Every lesson takes one idea at a time. You read it with the math worked out step by step, answer a question that puts it to use, then see why the right answer is right and why the others aren’t.
It’s for anyone who was never taught this, and you don’t need to know anything first. Every lesson is free. Lever works out what you already know, so you can start here or let your path bring you to it.
More in Investing
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1
Why money cannot sit still
Why cash slowly loses value, what it means to put money to work, and which money shouldn’t be invested at all.
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2
What risk actually is
What risk really means, why higher returns come with bigger swings, and how much ups and downs you can live with.
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3
What you can actually own
Stocks, bonds, funds and index funds explained, plus the yearly fee that never sends you a bill.
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4
Actually starting
Open the account, start small, invest a set amount on a schedule, and keep an eye on fees.
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5
The days you cannot pick
Why staying invested usually beats trying to time the market, and why the latest news is a poor guide.
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7
Limits, locks and deadlines
How much you can put into tax-advantaged accounts, the cost of taking money out early, and the deadlines to know.
6 lessons -
8
Moving it and naming it
What happens to your retirement account when you change jobs, and accounts meant for one specific purpose.
5 lessons -
9
Spending what you saved
How much you can take out each year in retirement without running out, and why the order of good and bad years matters.
5 lessons -
10
The mix that shifts
Choosing your mix of investments, rebalancing when it drifts, and all-in-one funds that do it for you.
7 lessons -
11
Choosing where it goes
Which account to fill first, which investments to keep where, and how to do it all if you work for yourself.
6 lessons
Try this module
It’s part of Investing. Lever will bring it to you when you’re ready, or you can go straight there.