Does the very mention of retirement planning have you scratching your head and wondering what to do next? Worse, is it preventing you from getting your retirement plan started? Don't let fear of the unknown stand in the way of your retirement planning efforts. Begin by getting a basic understanding of the various essential retirement plans that are available to you.
Traditional IRA definition
An IRA is a retirement account in which you can contribute a limited amount into each year to supplement your retirement savings. If you qualify, your contributions can be made on a pretax basis, meaning your taxable income would be lowered by the amount that you contribute. You can establish an IRA at a bank, a brokerage house, or any other qualified financial institution. Because IRAs are intended for retirement savings, if you withdraw the money before age 59½ you will owe income taxes on the distribution and may be subject to a 10% federal tax penalty.
Benefits of Roth IRA
Unlike a traditional IRA, a Roth IRA lets you invest after tax dollars, and as long as you meet certain conditions, the money generated within the Roth is typically non-taxable. This means that you won't pay any additional taxes when you withdraw your money if you have met the conditions for qualified distributions. If your employer doesn't offer a 401k plan, a Roth is a great way to save for retirement.
A 401(k) is a retirement account that's typically offered as a benefit to employees by an employer. It allows you to contribute a portion of your pre-taxed earnings into a tax-deferred account. Contributions reduce the amount of income that your taxes are based on, and any investment gains grow tax deferred.
What is a SEP IRA?
A SEP IRA is a retirement plan designed to benefit self-employed individuals and small business owners. A SEP IRA allows you to contribute a portion of your income to your own retirement account, deducting them from your income taxes. The maximum annual contribution limits are often higher than most other tax-favored retirement accounts.
Simple IRA plan
Also known as a Savings Incentive Match for Employees IRA, a Simple IRA is a plan that small businesses can offer to employees. Working much like a 401(k), contributions are made from pretax paycheck withdrawals, and any gains grow tax deferred.
These are just five of the most common retirement plans available, and most can be opened at any bank, brokerage house, or other qualified financial institution. As always, consult with a financial professional to discuss the various guidelines of each plan.