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401 (k) Retirement Plans and Individual Retirement Plans
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 secure a balance of investment products that may yield the retirement lifestyle many people dream of.
While most working Americans will receive Social Security benefits, in most cases, they will not be sufficient to provide a comfortable retirement income. Depending on personal circumstances, either a 401(k) retirement plan or an Individual Retirement Plan can help in working towards accumulating a sizeable retirement account.
401(k) Retirement PlansTOP
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 can also generate compound interest and capital appreciation. Depending on the type of plan selected, 401(k) plans can also offer yields 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 most cases
- Contributions taken from pre-tax salary allow for a reduced tax rate
- Tax deferral of compounding income and growth
- The opportunity to select from a variety of investment products
Individual Retirement PlansTOP
Another option for retirement planning is to contribute to an Individual Retirement Plan (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 or Roth IRA.
A traditional IRA is funded through after-tax dollars and can 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 A traditional IRA has several tax advantages: all income tax is deferred until money is withdrawn, and the growth of contributions and earnings is generally tax-deferred. A Roth IRA includes income tax payments, but when money is withdrawn, it is distributed tax-free as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws may change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss.
Contact us today to discuss alternative retirement planning options.