What Are the Different Types of Retirement Plans That Exist Today?
Americans spent anywhere from 40 to 50 years of their lives working toward their retirement. One of the biggest goals we have, when we head to work each day, is setting part of the money we earn aside for the years of our life when we aren’t working anymore. We accomplish that goal by putting our money into many different types of retirement plans.
If you’re new to the financial industry, you might be wondering what your options are when it comes to retirement. Read on to learn about the best retirement plans out there!
When you think of retirement plans, the first thing that comes to mind is probably a 401(k). A 401(k) is a defined-contribution plan to which both employees and participating employers contribute funds for retirement. It’s one of the most common retirement plans out there because a lot of employers offer them and they’re easy to set up.
Employees’ contributions are made on a pre-tax basis out of their paychecks, reducing their overall tax liability. You don’t pay income tax on your 401(k) until you begin to withdraw from it. The biggest downside to 401(k) plans is that you will be assessed a penalty if you withdraw before you’re 59.5 years old, and you must start withdrawing money at age 70.5.
A traditional IRA is a retirement plan that is available to pretty much anyone who is saving for retirement. People open and manage their IRAs on their own without having to worry if their employer offers it. Like a 401(k), traditional IRAs are funded by income that isn’t subject to income tax until you begin withdrawing money.
The biggest downside, however, is that the amount of money you can set aside each year is limited.
Focusing on the tax implication of your retirement accounts is one of the biggest retirement strategies to have in your toolbelt. In light of that, the Roth IRA is often considered one of the savviest investments you can make for retirement.
Roth IRAs work similarly to a traditional IRA, but the main difference is that you pay taxes on the money before it goes into your account. Since you earn more and more income throughout your life, the idea is that you pay less tax on a Roth IRA because you’re in a lower tax bracket when making contributions.
Since the tax is already paid, you don’t have to worry about paying tax on the proceeds during retirement. The biggest downside, however, is that you are limited in how much you can contribute to a Roth IRA each year.
Which Types of Retirement Plans Will You Choose?
This is just a short list of all the different types of retirement plans available to you. They all come with their own set of pros and cons, so be sure to take your time to do a deep dive into the best retirement plans for your needs. If you’re still struggling with making a decision, consider consulting a financial advisor to help you out.
The financial industry is not always easy to navigate. You’re bound to have questions as you continue to build your wealth throughout your life. Be sure to check out the rest of our blog for the answers to all of your financial questions!