Retirement planning may seem distant for most of you, but it is still vital to prepare for the future. Often, the most commonly known method of retirement saving is Social Security; however, this retirement option is rapidly losing its utility with increasing life expectancies. In fact, at current expenditure rates, Social Security is expected to run out in the next ten years! Understanding the different types of retirements, such as Individual Retirement Accounts (IRAs), 401(k) plans, and pensions, can help you make informed decisions to prepare yourself for a financially worry-free retirement.
The lack of education on financial assets can be best seen with the public’s handling of IRA accounts.
IRAs are usually opened by those who are self-employed or are not offered a 401k from their employer. Traditional and Roth IRA accounts are simple to open/operate and are offered by almost every financial institution. Traditional IRA accounts allow for a portion of your taxable dollars to be deposited and thus reduce your current adjusted gross income. However, taxes will be charged when the money is withdrawn. In addition, the money invested into this account is locked until the age of 59 ½ years, at which taxed withdrawals can be made. Any withdrawals before this age will result in a 10% penalty on top of the required taxes.
On the other hand, a Roth IRA permits the account holder to deposit post-tax income. This means that the money in the account grows tax-free. Since the income has already been taxed, there are no restrictions as to when the deposited money can be withdrawn; however, any financial frwoth that is withdrawn befor the afe of 59 ½ year will be taxed at 10%. This account also does not require a withdrawal ever so it has been deemed as the best asset to transfer wealth to beneficiaries. The biggest key difference to note between these two accounts is the time at which you receive tax benefits.
Another retirement option that deserves attention is the 401(k) plan. Unlike both IRAs, 401(k) plans are provided only by employers as part of their benefits package to an employee and cannot be opened from a financial institution. Similar to a traditional IRA, this type of retirement account allows individuals to contribute a portion of their pre-tax income, reducing their adjusted gross income. The money in a 401(k) account grows tax-deferred until it is withdrawn during retirement. Furthermore, this account can roll over into other 401(k) plans or an IRA in the case of termination from a position. An advantage to this account over an IRA is that many employers will match an employee's contribution. It's like getting free money for your future!
Along the lines of employer-based retirement accounts comes a pension plan. Though these plans are losing popularity, some employers still offer pensions after you spend a certain amount of time with their company. A pension plan is a plan in which an employer, and occasionally the employee, makes regular payments, around 3%, towards a large pool from which a pension is paid once the employee retires. For the same reason as the Social Security program’s depleted funds, employers are straying from pension plans and are more likely to offer the previously mentioned 401(k) plans.
Even if you will not be looking into pension plans or 401(k)s soon, being familiar with these financial assets provides you with a step up for financial security in your retirement. However, if you are closing in on your adult years, it is advised that you start seriously considering investing now so that you can secure your future financial stability.
