Funding your retirement is one of the best investments that you can make to ensure the financial future of you and your family. It’s important to plan for your retirement whether you have just finished high school at 18 or are about to enter your 60’s. It is never too early to start putting money away for your retirement. If you are planning on living a comfortable retirement based on Social Security; forget about it! According to USA Today, the average Social Security benefit paid out to retirees is a paltry $1,324 per month, which amounts to just $16,424 per year. That’s barely above the poverty rate of $12,490 for a single person. Depending on Social Security alone for retirement will severely reduce your quality of life. That makes funding your retirement an absolute necessity, far more important than taking vacations, buying a new home, or purchasing a new car. Funding your retirement can be the difference between retiring early and working full-time for the rest of your life. In order to make sure you are planning fore retirement properly, let’s take a look at the most popular types of retirement plans.
The Most Popular Types Of Retirement Plans
Traditional 401(k)’s & Roth 401(k) Plans
Let’s start with 401(k) plans. 401(k) plans are employer sponsored plans offered by for-profit companies meaning you can only invest in one through your employer. . You cannot go out and just start your own 401(k) plan. The best part about a 401(k) plan are the matching contributions that the employees can receive from the employer. Employers typically match from 3 to 6 percent of an employee’s pay. The matching part is what makes 401(k) plans so great. Who doesn’t like getting free money? Employees receive a tax deduction for contributions and tax deferral on all earnings until withdrawal. Withdrawals can begin at age 59 ½ and are mandatory by the age of 70 ½.
The main drawback of a 401(k) is that you don’t have a lot of control as to the financial products offered in the plan. If your employer picks a crappy plan, you may be stuck with underperforming funds. Not-for-profit companies such as hospitals, churches, etc. offer 403(b)’s, which are the equivalent of 401(k) plans. The annual contribution limit by employees to these plans is a maximum of $19,000. Employer matches do not count towards this limit. While traditional 401(k)’s, offer a tax deduction for contributors’ Roth 401(k)’s offer no such tax break. Roth 401(k)’s do however allow for tax-free withdrawals on all earnings and contributions making the big benefit of a Roth 401(k) tax free withdrawals.
Traditional IRA’s & Roth IRA’s
An individual retirement account known as an IRA is a personal retirement savings account for those who receive taxable income during the year. A traditional IRA is an individual retirement account, which allows an individual to set aside a specified dollar amount of income and to obtain a tax deduction for those contributions. All United States taxpayers that are not active participants in an employer sponsored plan are eligible to make contributions to a Traditional IRA. All of your contributions are tax deductible in a traditional IRA. The maximum annual contribution has been raised to $6,000 per year this year. All contributions are tax deductible as long as your employer doesn’t offer a qualified retirement plan. Single taxpayers covered by a workplace retirement plan have a phase-out range from $64,000 to $74,000. For married couples filing jointly, the phase-out range goes from $103,000 to $123,000. The phase-out range for a traditional IRA reduces the amount of the deduction that can be claimed. Traditional IRA’s have the same mandatory withdrawal age of 70 ½ as a Traditional 401(k).
A Roth IRA is an individual retirement account, which allows an individual to set aside a specified dollar amount of income after taxes. The Roth IRA is named after its chief legislative sponsor Senator William Roth. Roth IRA’s do not provide a tax deduction for contributions but do allow for earnings to be withdrawn completely tax-free. That’s a pretty sweet deal not having to pay taxes ever on your earnings. Roth IRA’s have an income phase out range from $122,000 to $137,000 for single tax filers and an income tax phase-out range from $193,000 to $203,000. The income phase-out for a Roth IRA reduces the amount of the contribution that can be made.
You can establish your own individual retirement account plan at any major bank or broker. TD Ameritrade, Etrade, Merrill Lynch, Wells Fargo, Citi, JPMorgan, and Fidelity are examples of brokers in which you can set up your own retirement plans. Remember that retirement plans can invest in stocks, bonds, mutual funds, exchange traded funds, treasuries, certificates of deposit, cash, etc. You can put just about anything in one.