About this Flash Card Set
16 Cards
by daniel_carter
Understand the retirement accounts that build long-term wealth: 401(k)s, traditional and Roth IRAs, employer matching, and how they're taxed. Clear, jargon-free explanations.
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401(k)
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An employer-sponsored retirement plan you fund with pre-tax paycheck contributions that grow tax-deferred until withdrawal.
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Employer match
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Free money: your employer contributes to your 401(k) based on what you put in (e.g., matching 50% of contributions up to a limit). Always try to capture the full match.
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Traditional IRA
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An Individual Retirement Account funded with (often) pre-tax dollars; contributions may be tax-deductible now, and you pay taxes when you withdraw in retirement.
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Roth IRA
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An IRA funded with after-tax dollars; you pay no taxes on qualified withdrawals in retirement, including all the growth.
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Roth vs. Traditional — the core trade-off
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Traditional = tax break now, taxed later. Roth = taxed now, tax-free later. Roth wins if you expect to be in a higher tax bracket in retirement.
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Tax-deferred growth
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Investment gains aren't taxed year to year, so your money compounds faster than in a taxable account.
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Vesting
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The schedule by which employer-contributed money becomes fully yours. Your own contributions are always 100% vested immediately.
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Required Minimum Distribution (RMD)
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The minimum amount you must start withdrawing from most tax-deferred accounts at a set age. Roth IRAs have no RMDs for the original owner.
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Early withdrawal penalty
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Taking money out of a retirement account before age 59½ usually triggers income tax plus a 10% penalty, with some exceptions.
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Rollover
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Moving retirement money from one account to another (e.g., an old 401(k) into an IRA) without triggering taxes, if done correctly.
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Contribution limit
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The maximum the IRS lets you contribute to an account each year. Limits differ by account type and are adjusted periodically for inflation.
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Roth 401(k)
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A 401(k) option funded with after-tax dollars — combines the higher contribution limits of a 401(k) with the tax-free withdrawals of a Roth.
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Compound growth (why start early)
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Returns earn their own returns over time. Starting to invest in your 20s vs. 30s can dramatically increase your final balance for the same monthly amount.
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Diversification
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Spreading investments across many assets (like a target-date or index fund) to reduce the risk of any single one hurting you.
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Target-date fund
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An all-in-one fund that automatically shifts from stocks toward bonds as you approach a chosen retirement year. A common default 401(k) option.
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Why a Roth is great when you're young
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Your income (and tax rate) is often lowest early in your career, so paying tax now and locking in decades of tax-free growth is especially valuable.
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