Retirement Accounts and Security Accounts in Simple Terms
Finances are complicated and hard to understand at times. Although they are such an important part of everyday life, finances and investing are generally not taught or prioritized in schools. Younger generations and people of color especially tend to learn about these subjects through their own research or by discussing their financial options with a bank teller. Black women especially have to overcome a lack of formal financial education through self education and by seeking out mentorship, given that the typical systems in the U.S. do not serve Black women well. For long term financial success, it is essential to save for retirement, which allows the option of not needing to work in old age and allows for the building of generational wealth, as the money in the account grows over time.
What is an IRA?
IRA stands for “individual retirement account.” There are two types of IRAs: Roth IRAs and traditional IRAs. To illustrate the differences between the two, let’s use two young women as an example. Ruth decides to open a Roth IRA and Tina decides to open a traditional IRA. Roth IRAs are taxed consistently while traditional IRAs charge a percentage when money is withdrawn from the account.
Ruth is a lower income individual and just decided to start a business, so she decided to open a Roth IRA. Ruth knows it is safer for her to open this account while she is in a lower tax bracket. Roth IRAs are taxed consistently, but there is no withdrawal fee on the account. Since Ruth is likely to withdraw from the account, she decided it would be safer to pay a consistent lower tax than to pay the withdrawal fee of a traditional IRA.
In contrast, Tina, a higher income individual, decided to open a traditional IRA and does not pay tax on her account. However, she has to pay a fee when she makes a withdrawal. If she decided to withdraw from her traditional IRA, the withdrawal penalty would be 10% of the account, meaning she loses 10% of her retirement savings every time she withdraws from the account. However, because Tina is in a higher income bracket, she is unlikely to withdraw from this account; a traditional IRA better suits her. When she turns 59 and a half (retirement age) she can withdraw from her account without any costs.
If Tina or Ruth were unemployed, neither of them would qualify for an IRA as it is not possible to open this account without a consistent income. If Ruth or Tina are employed, their employer may offer a 401(k), another type of retirement account. This would be a better option than a Roth IRA or a traditional IRA, as employers often match the amount their employee puts into their retirement savings, up to a certain percentage of their salary. This means if Ruth was to put $10 into her retirement account, her employer would contribute $10 as well, doubling her savings.
The sooner they set up an IRA account or a 401(k), the more money Ruth and Tina will have for retirement.
What is a Brokerage Account?
A brokerage account is a taxable investment account and allows the buying and selling of stocks, bonds, mutual funds, and ETFs (Exchange Traded Funds). All of these are also known as securities or marketable securities, so brokerage accounts may be referred to as Securities Accounts. Full service brokers, discount brokers, and online brokers are responsible for opening brokerage accounts. The funds put into this account may increase or decrease over time depending on the value of the account’s investments. Although a brokerage account does not protect the account from bad investments, it keeps track of the different securities bought and sold and keeps the investments organized in one place.
No matter the profession, a steady paycheck is only a part of growing and maintaining wealth. Being able to save for retirement and beyond is generally the result of long term investments, which is why generational wealth tends to grow over time. Black women specifically face a number of obstacles in building financial and generational wealth, including racism, sexism, and a lack of resources catered to their needs. Below are five Black women who have become financial gurus and are aiding other Black women in their journey to prosperity.
Leading Black Women in Finance:
Tai McNeely specializes in helping couples with their finance goals. Her book: Money Talks: The Ultimate Couples Guide to Communicating About Money.
Dannie Vann is a blogger who offers coaching, tips, and her personal story of how she went from poverty to financial stability. Her Instagram: @dannievann ~ Her Twitter: @penniestowealth
Dr. Melody Wright’s area of expertise is in helping those who want to fulfill their dreams, manage their financial growth, and have more flexibility in their finances and in their lives. She also offers financial empowerment coaching. Her book: Start Here: Your Guide to Building Your Money Management System
Naseema McElroy’s area of focus helps nurses and medical professionals take their finances into their own hands and get out of debt. Her podcast: “Nurses on FIRE”
Fo Alexander Is a Certified Financial Education Instructor (CFEI). She caters specifically to helping moms grow their income and get out of debt. She sells products for money management and online courses. Her book: Book Dump Debt & Build Bank: The Everyday Chick’s Guide to Money.
Fo Alexander, 9 Black Women Finance Experts You Need To Know.
James Chen, Exchange Traded Fund (EFT).
Christianna Hurt, Online Courses.
Impact Partners, Roth Vs Tax- Deferred Security Accounts: Which Is Best For You?
Samantha Silberstein and Skylar Clarine, Individual Retirement Account (IRA)
Leo Smigel, Securities Vs. Stocks: Clearly Explained.