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401 (k) Retirement Plans and Individual Retirement Accounts
Everyone looks forward to retirement, but not everyone looks forward to planning for it. A strong financial plan can take the hassle out of this process and seek a balance of investment products that may yield the retirement lifestyle everyone dreams of.
While most working Americans will receive Social Security benefits, in some cases, they may not be sufficient to provide a comfortable retirement income. Depending on personal circumstances, either a 401(k) retirement plan or an Individual Retirement Account can help in accumulating assets for retirement.
401(k) Retirement Plans
Employer-sponsored 401(k) retirement plans offer several benefits, including potential employer contributions. Enjoy tax savings by setting aside a portion of pre-tax salary in a tax-deferred investment account, which may also generate compound interest. Depending on the type of plan selected, 401(k) plans can also offer yield potential from a variety of investment options.
Working together with a financial planner, decide the amount and frequency of 401(k) contributions while taking into consideration contribution limits and employer requirements. Some advantages include:
- Employer contributions in many cases
- Contributions taken from pre-tax salary may allow for a reduced tax rate
- Tax deferral of compounding income and growth potential
- The opportunity to select from a variety of investment products
Individual Retirement Accounts
Another option for retirement planning is to contribute to an Individual Retirement Account (IRA). IRAs allow a variety of investment options, including variable annuities, stocks, and government securities. There are several types of IRAs, including the Traditional IRA, Non-Deductible IRA, or Roth IRA.
A traditional IRA is funded through pre-tax dollars, and can potentially be contributed to even if a client holds another retirement plan, such as a 401(k). A traditional IRA has several tax advantages: all income tax is deferred until money is withdrawn, and any growth of contributions and earnings is generally tax-deferred. The non-deductible IRA is similar to the traditional IRA except that contributions are made with after-tax dollars, and there is no income tax deduction allowed. In contrast to those two options, contributions to a Roth IRA are made with after-tax dollars, but when money is withdrawn, it is distributed tax-free assuming withdrawals are qualified. For all types of IRAs, withdrawals prior to age 59 1/2 may result in a 10% penalty tax, and for Roth IRA, the account must also be opened at least 5 years. Keep in mind that future tax laws can change at any time and may impact the benefits of Roth IRAs.
Other Retirement Planning Options
Depending on the nature of your employment, you may be eligible for other kinds of retirement planning options. For example, 457 plans are designed for independent contractors or employees of a state or local government or a tax-exempt organization. These plans allow participants to exclude certain specified types of salary from their gross income. Other options may include Deferred Compensation Plans and 403(b) plans, which are designed for employees of non-profit corporations.
Contact us today to discuss alternative retirement planning options.