Types of Retirement Accounts
We all need to save more for our retirement years. The
biggest issue and deciding factor of how much you have at
retirement is twofold.
First, how early you begin to save has a significant impact
on the end result. Second, the type of retirement account
can mean the difference between retiring rich and retiring
You should know before making one of the most important
decisions of your financial life that there are a vast
variety of different retirement plans for us to choose
from, and seeking professional advice may be the best way
to figure out what fits you best.
The retirement plan we are probably all the most familiar
with is the 401K plan. This plan is sponsored by our place
of employment. The employee makes his or her specified
contribution per paycheck.
Not every employer offers a 401k, but most bigger
corporations offer it as an incentive for their employees
to take advantage of.
The contributions to a 401 are made pretax, and are
withdrawn directly from the individual's paycheck.
Whatever an individual earns on these contributions may
compound and remains tax-free until the employee has it
distributed upon retirement.
The next retirement plan, and perhaps the second most
well-known and commonly utilized for it's tax benefits at
the opposite end is the IRA.
With the IRA, or individual retirement account, the amount
a person can contribute pretax is connected to the amount
earned in wages.
Using an IRA makes sense if your contributions are fully
deductible or your contributions are partially deductible
and you won't need the money before age 59 1/2, or if
you're already maxing out your 401K.
Within the category of IRA's, there are many different
types. The Keogh Plan is designed for a self employed
person or a partnership.
For small businesses to set up retirement plans, there is
the simplified employee pension or SEP plan. With the Roth
IRA, the contributions made are not tax deductible,
however, the returns will be distributed tax-free.
When contributing to a Roth IRA, your plan would be that
you'll pay less in taxes now than the rate you'd pay in
You would also want to confirm with your financial advisor
any tax benefits you may receive now for making
contributions to your IRA, if any, as this can
significantly reduce your taxable income in some cases.
A rollover IRA is meant for people who are retiring and
receiving money from a 401K or for people who are leaving a
There are more variations to investing for retirement and
far more detail to each kind of retirement account.
Review your own personal financial situation, your age (big
rule of thumb, the earlier the better), your income and
other variables to determine which investment option is
best for you so you can retire with peace of mind.
About the Author:
Danna Schneider is the founder of
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