The next big step in your life
Retirement planning seems deceptively simple when you’re looking at it from a distance, but when retirement is right around the corner, planning for it can become overwhelming. Thankfully, it’s not as frightening as it may seem when you learn how to compare retirement plan types and choose the most appropriate fit for your needs.
• Comparing Retirement Plan Types
You can’t properly plan for retirement if you don’t understand the different types of retirement plans (including qualified and non-qualified plans) available to you. Some examples of plans include:
• Traditional and Roth 401(k)
A traditional 401k is a tax-advantaged contribution plan that is managed by an employer. It can be funded from an employer profit sharing plan contributions, matching employer contributions, and/or employee elective salary deferrals. When your traditional 401k is set up, a percentage of your paycheck is automatically deposited into your 401k account. The amount you choose is completely up to you, but many financial professionals suggest that you at least match any employer contribution you are eligible to receive. Contributions you make to your 401k are tax-deferred until you withdraw them (any withdrawals made before age 59 ½ may be penalized by the IRS). A Roth 401(k) works in a similar manner, but contributions made to that account are on an after-tax basis. This means that when you’re ready to start taking withdrawals, assuming they’re qualified, you won’t have to pay ordinary income tax on those withdrawals.
• Traditional IRA
A traditional IRA (Individual Retirement Account) is similar to a traditional 401k in a lot of ways. As with a 401k, your contributions to a traditional IRA are tax-deferred until you make withdrawals (limitations may apply). A traditional IRA is not employer-maintained and does not qualify for employer matching.
• Roth IRA
Unlike a traditional IRA, the contributions made to a Roth IRA are already taxed. This means that when you withdraw your distributions after age 59 ½, they are tax-free. Both traditional IRA and Roth IRA accounts are self-maintained.
• Choose Your Retirement Plan
Ready to learn more about different types of retirement plans?