11 Ways to Plan for your Retirement
Planning for your retirement is very important, as there is no guarantee that social
security will be able to fully support you in old age. Below are 11 ways to plan
for your retirement and the associated tax benefits or consequences.
1. 401(k)
A 401(k) plan
is an employer-sponsored retirement plan in the United States. It is one of the
most popular retirement planning methods as it allows workers to save for retirement
while deferring income taxes on the saved money and earnings until the funds are
withdrawn. In the most common plans, know as participant-directed, the taxpayer
can choose from a number of investment options, that usually combine mutual funds,
bonds, or money market investments. Many companies' 401(k) plans also offer the
option to purchase the company's stock.
2. Roth IRA
The word IRA stands for individual retirement account. The distinguishing characteristic
of a Roth IRA is its favorable tax structure. Contributions to an account are made
only from income that has already been taxed, but withdrawals up to the total of
contributions are federal income tax free, and withdrawals of earnings (anything
above the total of original contributions) are usually free of federal income tax
as well.
3. Roth 401(k)
A Roth 401(k) is a retirement savings plan that represents a unique combination
of features of both a Roth IRA and a traditional 401(k) plan. Under the Roth 401(k),
employees can contribute funds on a post-tax basis, instead of – or in addition
– to pre-tax contributions to their traditional 401(k) plans.
4. Traditional IRA
A traditional IRA is a retirement account that is typically setup through a bank
or brokerage. Unlike the Roth IRA, the only criterion for being eligible to contribute
to a Traditional IRA is sufficient income to make the contribution. The main advantage
of a Traditional IRA is that contributions are often tax-deductible.
5. Simple IRA
A simple IRA is an employer provided, non-qualified retirement plan similar to better
known plans such as the 401(k). However it features simpler rules and less costly
administration. Like a 401(k) plan, the Simple IRA is funded by a pre-tax salary
reduction. However, contribution limits for Simple IRA plans are lower than for
most other types of employer-provided retirement plans.
6. Social Security
The United States Social Security plan is a social insurance program funded by payroll
tax contributions. It was setup to provide assistance for retired Americans, but
taxpayers are strongly encouraged to start their own retirement plans as living
off of social security benefits has proved difficult for many. In 2004, the U.S.
Social Security system paid out almost $500 billion in benefits, which makes it
the largest government program in the world and the single greatest expense in the
federal budget.
7. 403(b)
A 403(b) plan is a tax advantaged retirement plan available to public education
organizations, many non-profit employers, and self-employed individuals. The plan
is very similar to the popular 401(k) plan where payments are put into a 403(b)
account before income tax is paid on it. The funds are then allowed to grow tax
deferred until the money is taxed as income upon withdrawal.
8. 457 Plan
The 457 plan is another kind of tax advantaged defined contribution retirement plan.
However it is only available to governmental and certain non-governmental employers
in the United States. The employer provides the plan that allows the employee make
payment on a pre-tax basis. The plan is similar to a 401(k) plan, except, unlike
a 401(k) plan, there is no 10% penalty for withdrawal before the age of 59 ½.
9. Thrift Savings Plan
The Thrift Savings Plan, or TSP, is a retirement plan for civilians who have been
employed by the United States Government or who have participated in uniformed services.
It offers the same type of savings and tax benefits that many employers offer their
employees under 401(k) and similar plans.
10. Veteran's Pension
The veterans pension is a plan that provides benefits for veterans of the United
States armed forces. In order to be eligible, one must have served at least 90 days
of active military duty with 1 day during a wartime period. The individual must
not have been dishonorably discharged and, unless permanently disabled, must be
65 years or old to receive the benefits.
11. Old Fashion Savings
Putting money into an old fashion savings account may seem like a good way to plan
for retirement. However, it is not. All of the other plans listed on this list provide
some type of tax benefits, and usually higher interest rates then a standard bank
account.