Most of the people think that planning for the retirement is out of their reach, but in fact, it not that difficult. There are various retirement plans which you should learn, and they are very easy to understand if you know some basics of the retirement. Below you will get to know about the six types of retirement plans and accounts:
IRA or Individual Retirement Plan
This one the primary retirement account which you should have, it is tax-favored retirement plan and which makes you invest a certain amount every year and no taxes will be applied to it.
As the taxes are not applicable to annual gains in this account, so it helps you grow very soon. In regular IRA account only when you withdraw the money from your account in your retirement, then just the amount removed is subjected to taxes.
In case if you are not having your 401(k) retirement account in your company or the place of your work, you can also be able to deduct IRA contributions on your income tax return.
An IRA account is the investment of your money which will grow and help your retirement; you can invest money in your IRA account in the form of stocks, bonds, mutual funds, ETFs and some other various kind of investments.
With your IRA account, you are always able to buy and sell investments within your account.
Keep in mind that not to withdraw entire cash from your account before you attain the age of 59 1/2, as in this case you will be incurred 10% of tax on the amount withdrawn. Which is also known as the early distribution you may also be subject to federal, state and other related income taxes.
You should always educate yourself about the most basic and essential retirement account – IRA.
Roth IRA is a little bit different than regular IRA account, as the contributions are made after tax but the main advantage is any money which is generating under the Roth will not be taxed again.
The best thing of having Roth IRA account is that you can withdraw the money from your account at any time and also before you attain the retirement age, no taxes or penalties will be incurred upon you.
If you think that your income will grow, then you can always opt for the Roth account, and you can invest extra cash into it.
All the future withdrawals in your retirement will be tax-free.
401(k) Plans For The Retirement Plan
It is retirement which is set in your workplace by the company, offered as an employee benefit. Through this account, you can put your contribution from your paycheck which is already taxed in a tax-deferred investment account.
The main advantage of putting your pre-tax money in the 401(k) plan is that it will lower the income on which your taxes are based upon. Having 401(k) plan also let you grow your money which will not be taxed in your retirement when you withdraw it.
In case you have opted to withdraw the money from your 401(k) plan, you will be subjected to 10 percent of penalty on the amount removed and also subject to federal and in some cases local and other taxes. Some of the employers also offer 401(k) loan.
Most of the employers match up with your contribution in 401(k) plan, which is usually six percent and with the period, the whole amount will be yours.
If you are not matching up your contributions in your 401(k) plan as per the company match, then you are losing one of the best employee benefits.
There also some variation of this account which includes 403(b) plan – which for educators and nonprofit workers & 457(b) plan which if offered to the government employees.
Roth 401(k) Plan For The Retirement Plan
If you have opted for the Roth 401(k) plan, then you will be benefited with the features of both Roth IRA and 401(k) plan. It is retirement account type offered by the employers, but most of the employers don’t provide them as it is one of the latest retirement accounts.
The contributions in this account have usually come from after-tax paycheck instead of pre-tax salary. If you have met specific guidelines and grants then most of the times then all the learning in this account won’t be taxed in future.
Simple IRA Retirement Plan
This account type also is known as – Saving Incentive Match employees IRA. Usually, small companies offered this plan to their employees, and it is working it very much similar to 401(k) plan.
You can invest in the form of pre-tax paycheck withdrawals, and the money in this amount will grow and will be tax-deferred until retirement.
SEP IRA Retirement Account
If you are earning as a self-employed and no one is working under you, then you can opt for SEP IRA, in which you can contribute a portion of your income to your account, and you can deduct them from your income taxes.
The contribution which you make annually is much higher than other retirement tax-favored accounts available.
As per your growth and career, you can opt any one of the accounts described above; you can also have a combination of them as per your circumstances and future need.
You can also opt for changing one retirement plan to another if you want to save individual related taxes or as per the situation.
When you want to save for your retirement, you should always start with your 401(k) plan to have tax-deferred growth.
When you want to put your extra income and cash Roth IRA is one of the best retirement plans as it allows you to withdraw the amount required before retirement and without any early withdrawal penalty and also the amount will not be taxed.
You can also have the combination of both 401(k) plan and Roth IRA.