Simply Junior

They say that nothing in life is truly certain, save death and taxes – and nowhere is that adage truer than in the area of your own personal retirement. Preparing your personal finances for the inevitable day when you retire is the most responsible thing you can do to ensure that your golden years keep their luster. There are just so many plan types out there, though, and that can make it difficult to decide which one would best fit your overall circumstances and future needs. To help you get a running start in your decision-making process, here is a brief overview of some of the most popular retirement plans available.

Individual Plans

Most people have at least heard of the most common type of individual plan – the individual retirement account, or IRA. The traditional type of IRA allows each individual to contribute several thousand dollars a year to a retirement savings account – on a tax deferred basis. That means that the Federal government does not tax those gross earnings until they are withdrawn from your account at a later date, presumably when you are old enough to retire.

The Roth IRA, by contrast, allows for even greater relief from taxes – though it has certain income restrictions for participants that keep higher income individuals and coupes from using it. Basically, the Roth IRA is not tax-free at the time you make your contributions to the account, but the money you withdraw later in life will not be taxed. In other words, the tax burden is reversed. This is one of the rare types of retirement plans that are not available to high income earners.

Employer-based plans

There are also a number of plans that can be sponsored by employers. One of the oldest types is the defined benefit plan, which has been in use at some companies for more than a generation. It offers a set benefit amount for each employee at retirement, based on certain criteria. However, the fact that control over the investment portfolios is maintained by the company has led to many people in recent years experiencing the loss of their retirement benefits due to poor management. We have all seen the headlines over the last decade lamenting the loss of so many American workers’ company-run retirement savings.

Employees have, as a result, looked for more control over their own future. The defined contribution retirement plans allow for this control by permitting employees to make their own investment decisions within a certain framework that provides some protection from the turbulence of the market. OF these, the 401(k) is the most popular. Most of these plans involve joint employee-employer contributions, which are not taxed at the time of the contribution. Other types of direct contribution plans include those involving profit sharing, company stock ownership, and simplified employee pensions.

Obviously, you will want to do your homework prior to committing to any of these options, as each has its own relative advantages and disadvantages. In the end, though, there is no denying the importance of ensuring that you have some type of retirement planning vehicle in place to guarantee that you are cared for when you retire.

Retirement plans are an excellent way to plan for your future. It is a way to guarantee a stream of income when you retire or stop working due to any other reason. An Individual Retirement Account is commonly known as an IRA. It is a retirement plan that offers many tax advantages for retirement savings.

There are different types of retirement plans. IRAs can be obtained through work or provided by you, as a self-employed individual. Many different types of IRA plans exist in the USA, with the most common being the traditional IRA. Traditional IRAs are held at banks and brokerage firms, called a custodian. These institutions may place the contributions in certificates of deposit, mutual funds and stocks. Contributions to the IRA are tax deductible. This type of IRA takes into consideration some requirements such as income, filing status, and other accessible retirement plans, according to the guidelines of the Internal Revenue Service (IRS) of the United States.

Another type of IRA is the Roth IRA. These retirement plans invest in securities, common stocks, or mutual funds. Because the contributions are made from the individual’s income after it has been taxed, they are not tax deductible. Withdrawals from this type of IRA will be Federal Tax free for the total amount of contributions as well as the total amount of earnings. The drawback is that this IRA, as mentioned, is not tax deductible and a Traditional IRA is. As with the traditional IRA, there are penalties for early withdrawals of earnings that may not qualify under the plan’s withdrawal guidelines. Penalties take the form of Federal income tax and an additional 10% penalty of the amount for early withdrawal.

Simply put, a basic IRA retirement plan in the United States is provided by the employer. It comes in many forms and the most known is a 401k plan. There are also profit sharing plans and 403b plans. This is a simple plan in the sense that it reduces the cost of administration procedures.

For many people, retirement is that light at the end of the tunnel which is worked for throughout the course of our entire lives. Many people believe that retirement is when they live on easy street for the rest of their lives, but there are many pitfalls on the way to this address. Decide which retirement plan best suits personal needs and choose between a 401K, IRA, Roth IRA, or investment 401K options.

A lot of people who work for corporations and companies are offered a 401k plan in their contract with that business. A 401K is a deduction straight out of a person’s paycheck that gets put into a company account that may or may not have a company match policy. This is the easiest and safest way to save for someone’s retirement, especially if the company is putting up free money.

An IRA, or an individual retirement account, is a way for people to save for retirement who are not offered traditional 401K plans due to lack of a plan at a company or if they are in business for themselves. These accounts allow people to pay up to $5000 a year to be contributed to the account.

Roth IRA’s work along the same basic guidelines as traditional IRA accounts, but there some significant differences to be aware of. There is no tax break for funds that are put into these account when the money is deposited. However, the depositor is able to make a withdrawal when the account has matured without paying taxes on the deposit or the gains. This makes this type of IRA very attractive for younger investors.

The stock market is probably the highest risk and the highest reward for planning a retirement. Some companies offer investments back into the company and on the market general with money that normally would go into a 401k. If a company is strong, it can be much better than taking a smaller profit from a mutual fund or 401k. However, when investing in weaker companies, people stand to lose their entire nest egg.

While there is no set best way to plan someone’s golden years, retirement plans are important to make and maintain so people don’t become burdens to their families and to society in general. Social security is not enough to keep a person in the standard of living at which they are accustomed, so extra support is required. Choose one of these methods and watch the nest egg grow as the light at the end of the tunnel gets brighter.

There are different types of retirement plans – government-sponsored plans, personal plans, annuities and employer-sponsored plans.

What’s the point of knowing all these plans?

This is because your employer’s retirement savings plan is important for your future financial security. You should understand how your plan works and what benefits you’ll receive. And it’s in your best interest to keep track of your retirement benefits too.

Let’s look at these different types of retirement plans.

Government-Sponsored Plans

Social Security plan is the best example in this category.

Personal Plans

Individual Retirement Agreement or IRA is the most well-known example. They can come in different types according to their tax treatments.

Annuities

These are contracts established with an insurance company. They can be fixed and variable annuities .

Employer-Sponsored Plans

2 types – qualified and non-qualified retirement plans.

Qualified Retirement Plans

These plans meet the Internal Revenue Code (IRC) requirements and the Employee Retirement Income Security Act of 1974 (ERISA) requirements.

They offer several tax benefits such as allowing employers to deduct annual allowable contributions for each participant of the plan; contributions and earnings on those contributions are tax-deferred until each participant withdraw them and each participant can even further defer some of the taxes through a transfer into a different type of IRA.

You can go for these qualified plans:

(A) Defined Benefit (DB) Plans

These are company retirement plans like pension plans, in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk.

The employee, the employer, or both may contribute to the plan.

Examples of DB plans:

1. Pensions

They’re a type of retirement plan that guarantees a specific amount to be paid out to the employee when he/she retires. The amount is calculated based on an employee’s salary, years of service and a fixed percentage rate.

The Pension Benefit Guarantee Corporation (PBGC), a federal agency, covers employer-sponsored pension plans.

Eligibility for the plan depends on a company’s policy. Some companies require their employees to serve for a certain period of time before they can become eligible for a pension plan. If an employee leaves the job, the pension plan stays with the previous employer.

2. Annuities

They’re retirement plans that have fixed monthly payments at the age of retirement. You can’t transfer the annuities into an IRA account, hence the amount is taxed as regular income the year you receive it.

(B) Defined Contribution (DC) Plans

These plans allow the employer and/or employee to make contributions, so that the final benefits depend on how much is in the account and the rate earned by the account’s investments. Each participant needs to set up his/her own individual account in the plan.

The government doesn’t guarantee a participant’s pension benefits. Instead, the plan allows employees to decide on the investment, based on the employer’s options.

Some examples of DC plans:

1. Profit Sharing Plan

It allows an employer each year to determine how much to contribute to the plan (out of profits or otherwise) in cash or employer stock. The plan contains a formula for allocating the annual contribution among the participants.

2. 401k Plan

An employee can make contributions from his/her paycheck before taxes are taken out. The contributions go into a 401k account, with the employee often choosing the investments based on options provided under the plan.

In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage.

3. Employee Stock Ownership Plan (ESOP)

The employer contributes shares of the company’s stock to employees in return for special tax benefits.

4.Stock bonus plan

It’s a type of profit sharing plan, where contributions are made in the form of company stock.

Non-qualified Retirement Plans

These plans don’t meet the IRC or ERISA requirements. Employers fund these plans. They’re more flexible but don’t have the tax benefits qualified plans have. Upon your retirement, your employer pay you the benefits (in the form of annuities) which are taxed as ordinary income tax, or in lump sum payments, which you can transfer into an IRA to defer taxes.

An example is the 457 plan.

This plan aims at state and local government employees of tax-exempt organizations. Your contributions and earnings are tax-deferred until you withdraw them.

Distributions start upon your retirement but you can also take distributions if you change jobs or if you’ve an emergency.You can choose to take distributions in one lump sum, in annual installments or as an annuity. Distributions are subject to ordinary income taxes and you can’t transfer the amounts into an IRA.