If you haven’t started squirreling away money for your retirement years, you ought to. Many people tell themselves that they don’t need to think about retirement yet. Others say they are saving for other upcoming expenses, such as buying a home or a new vehicle. Some people feel like they aren’t in a good financial position to save for retirement—but there are people who haven’t given retirement any thought! When you do start saving for retirement, which you should do sooner rather than later, you need to look into a specifically retirement account. There’s more than a 401k out there. Here are some of your options.
You’ve probably heard of the 401k before. In fact, many employers have a 401k retirement program for their employees. A 401k is a tax-deferred savings account. You can select a portion of your paycheck to be deposited into your 401k, and it will be taken from your pre-tax amount. It’s common for employers to have a matching program as well; most will match a portion of every contribution you make (up to a set limit) each year.
Individual Retirement Arrangements (IRAs)
An individual retirement account is an alternative retirement account. There are different types of IRAs that you can choose for your needs. A traditional IRA allows you to make tax-deferred contributions; when you withdraw money in your retirement years, the amount will be taxed according to the income bracket you belong to then. Alternatively, you can open a Roth IRA and make post-tax contributions and make tax-free withdrawals after retirement. You may prefer making taxed contributions, as you may be in a higher tax bracket after retirement. Rollover IRAs are used when you’re moving money from another retirement account, such as a 401k, into an IRA.
Employees working for tax-exempt organizations, such as government offices, public schools, and hospitals, can enroll in a 403(b) plan. 403(b) plans are similar to 401ks in function, but they have different restrictions. A 403(b)’s investment opportunities are more limited than the 401k, and tend to have shorter vesting periods.
Are you employed by your state or local government? If so, you’re eligible for a 457 plan. 457s operate similarly to the aforementioned 401k plan: employees allot a percentage of their paycheck to be contributed from their paycheck. Contributions are tax-deferred.
The pension plan is a sought out retirement plan that is hard to find. In a traditional, defined-benefit plan, your employer will make the contributions towards your retirement plan. After a set period of time, you receive the funds when you retire, regardless of how well the employer’s investment pool performs. On the other hand, a defined-contribution pension plan is a little less reliable. The employer will still make contributions to your pension, but you aren’t guaranteed a certain amount after retirement. The funds are dependent on the investment pool. These days, many employers are phasing out pensions and replacing them with 401k plans. However, some fields are still holding onto the pension.