Saving for Retirement Using 401Ks, Traditional IRAs and Roth IRAs.

Written by: Scott Sery

Most people will investment to help them save for retirement.  For much of the population retirement is still a long ways away.  For many people retirement may be further away than previously thought.  With a little planning now, and understanding which type of account to use, a person can make headway toward retiring when they want, with the lifestyle they desire.

The most popular way to save for retirement is in a 401(k) plan.  These plans are offered by nearly all the major companies, and most people have the opportunity to invest in their company’s 401(k).  The setup process is quick and easy.  Many companies have even switched to automatic enrollment when a person starts working or becomes eligible (some companies require a minimum amount of service before allowing a person to enroll).  The employee can select how much they want to come out of each paycheck, either a dollar amount or a percentage (for 2012 a person can put in up to $17,000 with some special rules for those over 50 years old).  The employer will often match a certain portion of what the employee decides to contribute.  The money to be invested will come out of the employee’s paycheck before taxes.  It will then grow in the plan only to be taxed when it is finally withdrawn.  As long as a person waits until after the age of 59.5 the withdrawals will only be subject to taxation at the participant’s current tax bracket.  These plans are subject to the required minimum distribution rules.

While most companies will offer a 401(k) plan, there are some that offer different types of employer sponsored plans.  For those who are self-employed with no employees, the Simplified Employee Pension (SEP) IRA could be an option.  With this plan a person can put up to $50,000 (or 25% whichever is less) in 2012.  The rules are basically the same as a traditional IRA, with the catch that if there are any employees, the employer must put in the same percentage to each of the employees as he or she puts into his or her own plan.  For those with employees, a Savings Incentive Match Plan for Employees (SIMPLE) IRA may be a better choice.  With a SIMPLE IRA the employer must follow some rules for matching contributions, but otherwise the employee decides how much he or she wants to contribute, up to 100% of their salary or $11,500 whichever is less.  There are a few other more complicated employer sponsored plans out there (ESOPS, Profit Sharing Plans, Pensions, and Deferred Compensations) that are fundamentally the same: they will provide assets to be used in retirement.

After a person has reached the contribution limits for their employer sponsored plan they can still set up an Individual Retirement Account (IRA).  The Roth IRA and the Traditional IRA both provide a great platform for investing money for retirement, and allow the investor tax benefits along the way.

The downside of many of the retirement savings vehicles is that there are income limits or contribution limits.  For example: a married couple whose adjusted gross income is over $173,000 will not be eligible to contribute to a Roth IRA in 2012.  There are still options however.  An annuity can be utilized as a great place to store up money for retirement.  There are no income limits to open and fund an annuity, nor are there limits as to how much can be invested into one each year.  The gains in an annuity are tax deferred, and the account can either be taken in lump sums or it can be annuitized into an income stream later in life.  An annuity does not offer quite the tax benefits a qualified account offers, and the company issuing the annuity may place higher than usual fees on the investments, so any annuity contract should be entered into with caution.

When it comes to saving for retirement a person will generally have either a 401k or an IRA plan, if not both, they can utilize.  But many people do not take advantage of the plans that are offered to them, and often it boils down to the fact that they simply do not understand them.  By taking just a few minutes to learn how a plan works, and realizing it is really quite simple to invest, anybody can take advantage of investing now in order to have the retirement of their dreams.  In the next article we will look at what accounts, how much, and how often a person should invest.


Saving for Retirement Using 401Ks, Traditional...

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