What You Need to Know About Retirement Plans

It’s never too early to start preparing for your retirement. Experts advise that individuals start building a nest egg as early as in their 20s. When retirement age comes, you want to have the money to live a fulfilling and comfortable life and make sure your money outlives you.

Your future retirement income is your pension and social security. However, these sources tend to fall short of the amount you’ll be needing on a monthly basis. This is why it’s more than common to have other sources, which are employer-sponsored retirement plans and individual retirement plans. Each type of plan will have its own pros and cons, so take a look at what different plans entail.

401(k) plan

In this type of standard plan, employees are meant to contribute to their account while they’re still working. The important factor in this plan is that it’s a pre-tax savings account, and the contribution is made from your paychecks. The earnings over the years will constitute your retirement fund at the termination of your work. However, different companies require employment for a specific number of years before you can gain access to the fund.

Roth 401(k) plan

It’s similar to the 401(k), yet differs in how you get taxed. In Roth, contributions are made after taxes are taken out, while in the 401(k) plan, you are taxed before the contribution. This means you receive tax-free withdrawals upon retirement. It’s also similar to the 401(k) plan in that it has a contribution limit. In 2018, the contribution limit was $18,500 per year, or $24,500 if you’re over 50. 

Individual Retirement Account (IRA)

There are several types of IRAs, with the Traditional IRA and Roth IRA are being the most common ones. Each account has its own rules and restrictions based on your income or employment status, as well as limits to how much you can contribute to the account each year. There are penalties, however, if you need to access this money before retirement age.

Traditional IRA: Here, the contributions you can make into an IRA are limited to $5,500. You can leave contributions as is in cash or invest, which is often recommended. We’ll give you an idea of what you can invest in with the next type of plan.

Gold IRA: Bonds and stocks represent the majority of what IRAs invest in. Yet, the tax code also allows investments in “self-directed” accounts that can contain precious metals, such as gold. You can buy a precious metal straight into your IRA account and the IRS stipulates the kinds of coins or metals that are allowed, gold being one of them. A Gold IRA has its benefits, such as helping you hedge against inflation. It also allows you to buy and sell shares and hold them in a conventional IRA or 401(k). Another benefit is that there are no minimums and no special accounts needed. Gold typically has its own value and doesn’t get affected much during market hits and fluctuations. 

Roth IRA: The Roth IRA is basically an account that you can start putting any type of investment into, be it stocks, bonds, gold, or mutual funds. Like a traditional IRA, your limit is $5,500. Actually, you’re not allowed to contribute if you’re in a higher bracket of earnings. And if you make too little money, it might not be the best choice for you, since investment might not interest you. In a traditional IRA, you’re pretty much forced to take money out at the age of 70 and a half. With Roth IRA, you don’t have to. Typically, you can take out money anytime, as long as five years have passed since your first contribution.   

SIMPLE IRA: The Savings Incentive Match for Employees (SIMPLE) IRA is a retirement plan that small businesses with up to 100 employees can offer their personnel. There’s not a load of documents required, which makes it ‘simple’ to open up. It works very much like a 401(k) and contributions are pre-taxed, which reduces your overall tax liability. Contributions are made with pre-tax paycheck withdrawals, and the money grows tax-free until retirement. However, you can’t borrow from a SIMPLE IRA the way you can from a 401(k). 

A good part of your decision regarding which plan to choose will depend on when you want to pay taxes; before or after contribution to your plan? Also, early or later access to your money will be another aspect to look into when making a decision. Each plan has something to offer so that you can look forward to your retirement.