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Financial Literacy
Course: Financial Literacy > Unit 11
Lesson 4: Investments and retirementBuilding a foundation for retirement
It takes time to build a strong financial base for retirement, but starting now will make it less daunting down the road. From personal investments to IRAs to a 401(k) find out what you can do to start planning for your future.
The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.
Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.
Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Want to join the conversation?
- Could someone explain what solo 401(k)s, SEP IRAs, and 403(b)s are as they aren't covered in Sal's videos? Thanks!(3 votes)
- Solo 401(k), also known as an independent 401(k), is a plan set up for an individual running a sole proprietorship or a small business with a spouse/immediate family member. The individual contribution limit is the same as a typical company-sponsored 401(k), but the owner can also make an employer contribution to the solo 401(k), which increases the total contribution limit.
SEP IRA, short for Simplified Employee Pension IRA, can be thought of as a traditional IRA with the ability to receive employer contributions. SEP IRAs often have higher annual contribution limits than standard IRAs.
403(b) is a plan for specific employees of public schools, tax-exempt organizations and certain ministers. These plans can invest in either annuities or mutual funds. The features are comparable to those found in a 401(k) plan.
Investopedia is generally a good source to look for information on these kinds of things :)(5 votes)
- Guys tell me which one you prefer, the IRA or 401(k) program and why?(3 votes)
- I chose the 401(k) program.(1 vote)
- If I choose the 401(K) as my retirement plan, do i still have to pay that FICA 7.65% tax on my salary?(1 vote)
- Contributions to Social security, governed under the Federal Insurance Contributions Act (FICA) are based on income. These are not taxes (like income taxes). You still contrubute to the Federal Insurance scheme (social security) so that people currently disabled or retired can draw on those funds to live. When you eventually retire, those who contribute to the fund will be paying for your life.
If you choose the 401(k), you are deferring the payment of INCOME tax until you begin to draw on those funds. You will, though, get taxed on them.
The FICA and the 401(k) are different things.(2 votes)
- Whats te best way to get 401k.(1 vote)
- Get a job, preferrably one where the employer offers a 401(k) match. Whether or not the employer offers that, visit a bank and sit with the new accounts person there who can help you set up an IRA, a Roth IRA, or a 401(k). The person at the bank can guide you. But FIRST, get that job.(1 vote)
Video transcript
Retirement can mean
different things for different people. It could mean stopping work entirely
and travelling the country, or it might mean quitting
a full time job to work part time
and pursue something you love. Now, if you’re just getting
started in a career, you may not be thinking
about when you want to retire or what kind of lifestyle
you’ll want when you do. But just because
you’re not thinking about it yet doesn’t mean you shouldn’t start
preparing for it, because the earlier you start saving
for your retirement, the more flexibility you’ll have
to create the future you want. One way to get started
is to open a retirement account and start contributing
to it regularly. You can then choose
to invest that money in things like stocks, bonds,
and mutual funds. By investing, you’re giving
your retirement fund the opportunity
to potentially grow over time. There are of course,
some risks to investing. Investment accounts aren’t FDIC
insured and aren’t bank guaranteed. And, as the market rises and falls,
investments can lose value. However, historically,
over the long term, there have been periods in which
the market has recovered losses. It’s also worth noting
that some investments can be riskier or
more volatile than others. And while not all investments
may do well, on a whole, market growth has historically
outpaced the rate of inflation. Of course, past performance is
no guarantee of future results. But, investing is one way
of potentially offsetting the effects of inflation on
your money over the long term. Now let’s look two types of retirement
investment accounts you might encounter. Of course, there are many more, but for now, we’re just going focus on
two of the most common ones. Sometimes, they’re referred to
as “retirement vehicles.” You could even think
of them as vehicles that can carry your money
toward your financial goals. Some retirement accounts
might be offered through your employer,
like a 401(k). Other accounts you can
set up on your own like Individual Retirement Accounts
or IRAs. Employer plans,
like 401(k)s are often set up so that you can
automatically set aside a portion of your paycheck
to help build your account. Some companies even help out by contributing an additional
amount of money to your account. This can be an excellent benefit
to take advantage of. Accounts you set up on your own,
like IRAs, won’t have that employer match
but you’ll have the freedom to shop around for
an account that’s right for you and typically choose between
a larger selection of investments. You can manage these
accounts on your own or have a professional help you. Retirement accounts like 401(k)s
and IRAs offer tax advantages, but they also have
potential drawbacks. For example, you could be charged
a substantial amount of additional tax if you withdraw money
from them early. Basically they’re designed to
encourage you to set money aside for retirement and discourage
you from being tempted to use the money you’ve invested
before you retire. Whatever you might envision
for your future, if you start early enough,
time is on your side. By doing your own research
or working with a professional, you can start to create
an investment plan that takes your personal goals and ideal retirement date
into consideration. Starting a retirement account early
and adding to it often can give you more options
and flexibility in the future.