|
-
What Are Retirement Accounts?
-
Employer Based
Retirement Plans
-
401(k) Plans
-
Individual Retirement Accounts (IRAs)
-
Roth IRA
-
What is a Rollover IRA?
-
Converting and
Recharacterizing of an IRA
-
Education IRA & SEP IRA
-
Self Employed Retirement plan: Keogh
Preparing for retirement has become more
important than ever before for one simple reason: We are living longer. you have
the chance now of living nearly as long after you leave work as you lived before
going to work. In this day and age, however, you can no longer expect
nor rely on the government to provide the means necessary for your financial
comfort and security post retirement. If you do not take the time to plan and
provide for your own post retirement financial security,..... trust me.....it
won't be there. Therefore this section, in my opinion, is one of the most
important subject.
To enjoy retirement you want takes planning,
just like everything else in life. Careful planning for retirement will allow
you to choose your life style instead of having to settle for one. The earlier
you start to plan, the better your chances will be for living well on your
retirement income. There are more investment vehicles available today than ever
before to help us plan wisely. Retirement accounts such as IRAs, 401(k)s, etc.,
weren't around in previous generations, nor were there as many corporate pension
and savings plans.
The best time to begin planning for your
retirement is as you begin to work. Unfortunately, too many young people
starting out in their first job don't think that retirement will come as soon as
it does. Since we can't seem to impress young people to start planning for their
golden years early on, at least we can comfortably say, "It's never too late to
start".
When we think of "retirement plans", we
generally are thinking of plans sanctioned and approved by the U.S. Congress,
granting specific "tax related" benefits to plan participants. These
plans are called "Qualified Retirement Plans". They have been
"qualified" by the U.S. Congress to enjoy special beneficial tax treatment from
the Internal Revenue Service. Any retirement plan which does not enjoy this
"special tax treatment" is termed "Unqualified".
There are two primary types of qualified retirement plans; those that are
"individual" based and those that are "employer" based.
What are
Retirement accounts?
When you want to invest in
financial instruments such as CD's, bonds, stocks, etc. you can choose to invest
in either a regular taxable account (a non-retirement account) or
a retirement
account. In contrast to a taxable account, your retirement account has several
tax advantages. The money inside your retirement account compounds and grows without taxation. You generally only pay taxes on it when you withdraw money
from your account. And in the case of Roth IRA, you don't even have to pay taxes
on your earnings. Also depending on your situation, you may be able to deduct
your contributions (money you put in your retirement account) from
your current income, in effect, reducing taxes you would otherwise have to pay
to uncle Sam.
Because retirement
accounts are such a sweet tax shelter, there are all sorts of regulations
controlling how money goes in and comes out. There are also limitations on how
much you can contribute to a retirement account. Each has it's own limits,
rules and possible penalties for breaking them. Knowing as much as you can about
the plan you want to contribute in -- or the plan of a company you may be
considering -- is crucial.
There are two main ways
you can establish a retirement account: a qualified plan with your employer (employer-sponsored
plans) like 401(k).
A qualified plan is
established by an employer to provide retirement benefits for employees and
their beneficiaries and/or you can open an individual retirement account (IRA) on
your own. And if you work for yourself, you can open a self-employment plans
like KEOGH.
Employer-sponsored plans (Qualified Plans):
With these, your employer sets up the retirement plans such as 401(k). They do all the work,
including the selection of investment options. All you have to do is make a
contribution. Most of the company-sponsored plans have limited
predetermined investment options. But they do offer basic variety of financial
instruments such as money market, bond mutual funds, stock mutual Funds and some
companies offer option of buying in the company's stock, sometimes at a discount
to market value. Your contributions to company-sponsored plans are
excluded from your reported income and thus are generally free from federal and
state income taxes.
Individual
Retirement accounts (IRAs):
Anyone with compensation such as employment income can contribute to IRA
accounts. You are allowed to contribute 100% of income up to a specified maximum
dollar amount. There are several types of IRAs, the most common ones are:
Traditional IRAs, Roth IRAs, Education IRAs, SIMPLE IRAs, and SEP IRAs. Traditional and Roth
IRAs are established by individual taxpayers. Contributions to the
Traditional IRA may be tax-deductible depending on the your income, tax-filing
status, and coverage by an employer-sponsored retirement plan. Roth IRA
contributions are not tax-deductible but distributions are tax free.
Education IRA is just like
Roth IRA but funds can only be used for educational purposes. SEPs and SIMPLEs are retirement plans
established by employers, mostly self employed individuals with or without
employees. Individual participant's contributions are made to SEP IRAs and
SIMPLE IRAs.
Self employment
plans:
When you work for yourself, you
don't have an employer to do all the work to set up a retirement plan, so you
need to take the initiative. Even though there's more work for you, the good
news is that you can select and design a plan that meets your needs. Self
employment retirement savings plans often allow you to put more money away on a
tax-deductible basis than employers' plans do. When you have employees, you are
required to provide coverage for them under these plans.
|
What's the
difference between saving money in my company's retirement plan
and putting money into a mutual fund or bank account?
In a word "TAXES".
An ordinary savings account or mutual fund doesn't allow you to
save on a tax-deferred basis. So in an ordinary savings account,
you're saving money that has already been taxed, and you continue
to pay tax annually on the earnings of that account, too. The
money you contribute to your company's 401(k) retirement plan,
however, comes out of your paycheck before taxes are taken
out.
Plus, you don't pay
income tax on the money you contribute to your 401(k) account or
on any earnings until you take it out, which is usually at
retirement, when you may be in a lower tax bracket. The bottom
line: More of your money is working for you instead of going
toward taxes. Keep in mind, however, that investing in your
company's retirement plan is only a part of a sound retirement
saving plan. It is still important to have personal savings aside
from your retirement savings, too.
|
Next-->>
Employer Based Retirement Plans
|
