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Financial Literacy
Grade 10-12
Retirement Accounts (401k, IRA, Roth) Cheat Sheet
A printable reference covering 401(k) plans, traditional IRAs, Roth IRAs, employer matches, tax treatment, and withdrawal rules for grades 10-12.
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Retirement accounts help people save and invest money for the future while receiving tax advantages. This cheat sheet explains the main differences among 401(k) plans, traditional IRAs, and Roth IRAs. Students need these ideas to understand paychecks, employee benefits, long-term investing, and how early financial choices can grow over time. Knowing the basics can help you compare accounts and avoid costly mistakes later.
Key Facts
- A 401(k) is an employer-sponsored retirement account that often allows payroll deductions and may include an employer match.
- An IRA is an individual retirement account that a person opens outside of work, often through a bank, brokerage, or investment company.
- Traditional 401(k) and traditional IRA contributions may reduce taxable income now, but qualified withdrawals are taxed later.
- Roth 401(k) and Roth IRA contributions are made with after-tax money, but qualified withdrawals can be tax-free later.
- Employer match formula: employer match = employee contribution eligible for match x match rate.
- Compound growth formula: future value = principal x (1 + annual return)^years, not including extra contributions.
- Early withdrawals before age 59.5 may trigger income taxes and a 10% penalty unless an exception applies.
- Vesting means the employee owns the employer-contributed money only after meeting the plan's time-based rules.
Vocabulary
- 401(k)
- A retirement savings plan offered by an employer that lets workers contribute part of their paycheck to investments.
- Traditional IRA
- An individual retirement account where contributions may be tax-deductible and withdrawals are usually taxed in retirement.
- Roth IRA
- An individual retirement account funded with after-tax money where qualified withdrawals can be tax-free.
- Employer Match
- Extra money an employer contributes to a worker's retirement account based on how much the worker contributes.
- Tax-Deferred
- A tax rule where investment growth is not taxed until the money is withdrawn.
- Vesting
- The process of earning full ownership of employer contributions after staying with an employer for a required period.
Common Mistakes to Avoid
- Confusing traditional and Roth tax treatment is wrong because traditional accounts usually save taxes now, while Roth accounts usually save taxes later.
- Ignoring an employer match is costly because it can mean giving up extra retirement money that the employer is willing to contribute.
- Withdrawing retirement money early is a mistake because taxes, penalties, and lost compound growth can greatly reduce long-term savings.
- Assuming an IRA and a 401(k) are the same is wrong because a 401(k) is workplace-based, while an IRA is opened by an individual.
- Forgetting vesting rules is risky because leaving a job too soon may mean losing some or all employer-contributed money.
Practice Questions
- 1 Your salary is $48,000 and you contribute 6% to a 401(k). How much do you contribute in one year?
- 2 An employer matches 50% of your 401(k) contributions up to 6% of salary. If your salary is $60,000 and you contribute 6%, how much does the employer add?
- 3 You invest $2,000 in a Roth IRA and it grows at 7% per year for 10 years with no extra contributions. Using future value = principal x (1 + annual return)^years, about how much will it be worth?
- 4 Explain why a student starting a first full-time job might choose to contribute enough to a 401(k) to receive the full employer match before adding money to another account.