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 an 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: with your employer (employer-sponsored
plans) like 401(k) 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 .
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.
Employer-sponsored 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.
You'll be able to find the answers to all
sorts of questions you had about retirement in this book by Lynn
O'Shaughnessy. This is a complete guide to
the personal finance issues surrounding retirement, from 401K's to estate
planning and trusts. It also features information on saving money on
taxes, calculating how much money will be needed for a comfortable
retirement, and the essentials of IRAs, stocks, bonds, mutual funds and
other investments.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
