You are now at the age where you have realized that you better start seriously planning for retirement. You may have heard of different vehicles such as an Individual Retirement Account (IRA) or 401(k). The question is which one is best for you?
The deciding factor may come down to what type of retirement plan your employer offers. For example, if you work for the federal government, you can save in a Thrift Savings Plan (TSP). If you work in the private sector, your employer may offer a 401(k). Educators and employees of charities and religious organizations may have access to a 403(b). State and local government workers can make contributions to a 457 while some government agencies, educational institutions and non-profit organizations offer 401(a) plans. You may be self-employed and considering a Traditional, Roth, SEP or SIMPLE. These are all types of IRAs. If you are one of the fortunate, you may even have a pension plan!
There are some differences in each type of retirement savings plan such as contribution limits and withdrawal provisions. However, what they all have in common is the benefit from tax deferred savings. All of the plans mentioned above with the exception of the Roth IRA, offer tax deferral on the contributions and earnings. A Roth IRA does not offer tax deferral on the contributions however, the earnings grow tax free and you do not pay taxes on distributions during retirement.
Plans such as a 401(k), 401(a) and 403(b) are a great way to save for retirement. Not only do you receive a tax deduction and the funds grow tax deferred, another benefit is the potential employer match. Many employers will match a portion of the employee’s contribution up to a certain percentage. This is a huge benefit because it is free money! Why leave money on the table?
If you are self-employed you are on your own to fund retirement so you may have to be more aggressive. The bright side is that plans such as a SEP IRA or self-employed 401(k), can allow higher contributions limits than some employer sponsored plans. As with all retirement plans, contribution limits depend on earned income thresholds.
Although it is essential to save for retirement, I recommended that you have adequate emergency savings before investing in a retirement savings vehicle. This is due to the restrictions of retirement accounts should you need to access funds. Keep in mind that saving for retirement requires long term investing. Therefore, funds can’t be withdrawn before age 59 1/2 without a penalty unless the distribution meets an exception defined by IRS guidelines or the withdrawal provisions of your retirement plan.
There are many options available to build your nest egg for retirement. It is important to understand your options and take advantage of a savings vehicle that will maximize your retirement savings. Saving for retirement may be the biggest financial goal you will have to plan for in your lifetime. So plan for financial success so that you can enjoy the golden years of your life!
