Retirement Account is important to put money aside for those
planning for retirement in order to alleviate the rising stress levels caused from
different problems.
Have you ever worried about picking a retirement account,
which is like choosing ice cream at a place with dozens of flavors? Until it's
too late, you never know if you've got the best flavor or not.
So which account do you favor? Should you choose your
work-based 401k or your own IRA? Or is another type of account a better choice?
Explore the strengths and weaknesses of each.
Given below are the different types of retirement
accounts:
- Individual
retirement accounts(IRA)
- Roth-IRA
- SEP-IRA
- Simple
IRA
- Money
Purchase Pension Plans
- Profit
Sharing Plans
- Multiple
retirement accounts
Individual Retirement Accounts
A traditional IRA lets you put away money for retirement
every year, up to $4,000 if you're less than 50 years old. If you're 50 or
older, the limit was $4,500 in 2005 and is $5,000 in 2006.
If you're not
covered under another retirement plan, such as a 401(k), you don't pay income
taxes on the money you contribute when you contribute it.
The Roth IRA works much the same way with one major
difference: You don't get a tax break when you deposit the money, but the money
is tax-free when you take it out.
And, unlike a traditional IRA, you can tap
the money you've contributed at any time without triggering taxes or penalties.
You can start taking retirement income from the account as early as 59 1/2, as
long as the account has been open for at least five years.
The big plus of an IRA: It's easy. The only requirement is
earned income. You can set one up almost anywhere. Since you, not your
employer, choose the custodian, you can select a plan that offers the types of
investments you want.
IRAs also offer the best benefits to your beneficiaries.
"It's the best one to die with," says Picker. Many 401(k) plans
require a lump-sum distribution after death, which can trigger tax problems for
no spousal heirs.
With an IRA, you must name a beneficiary. With a 401(k),
your spouse, if you have one, is automatically your beneficiary unless you take
steps to change that.
With most IRAs, you can pull money, such as contributions
and earnings, out without taxes or penalties for certain life cycle events
prior to retirement, but it depends on the rules of the account you have.
Roth-IRA
Contributions to a Roth IRA are not tax-deductible. Instead,
qualified distributions from the account are tax-free. A distribution would be
considered qualified and tax-free if certain criteria are met.
Maximum
contribution is the lesser of $4000 or 100% of compensation per tax year for
2006. For those individuals who are 50 or older at the end of the taxable year,
an additional annual "catch-up" contribution of $1000 may be made.
SEP-IRA
A SEP is for business owners seeking a simple, low cost
retirement plan providing the opportunity to contribute as much as 25% of
compensation up to the set dollar limit per plan participant
Simple IRA
A Simple plan is for a business that has 25 or fewer
employees where that business does not currently contribute to a retirement
plan.
Simples enable a business to establish a 401(K) type employee savings
plan without the typical administrative costs and complexities associated with
a traditional 401(K) plan.
Money Purchase Pension Plans
A Money Purchase Pension Plan is appropriate for employers
who want contribution flexibility. It is available to sole proprietors,
partnerships, corporations, "S" corporations, and nonprofit organizations.
Maxim employer contribution - lesser of 25% of total net compensation or
$42,000 (for 2005) and $44,000 (for 2006) as indexed thereafter per participant
(20% if self employed). Contributions are discretionary.
Profit Sharing Plans
A Profit Sharing Plan is designed for employers who
want contribution flexibility. Available to sole proprietors, partnerships, corporations, "S" corporations,
and nonprofit organizations.
Fixed annual employer contribution rate (minimum
of 3%), up to 25% of total compensation not to exceed $42,000 (for 2005) and
$44,000 (for 2006) as indexed thereafter per participant (20% if self
employed). Contributions are mandatory.
Many people find it difficult to save well in advance of their
retirement years, because they have other more immediate worries, such as
family expenses and house payments.
In cases such as these, it is still a good
idea to put some extra money into a retirement account, but just in smaller
amounts and not on a frequent basis.
Additionally, it can be a comfort to know
that if an emergency arises, although it was not intended for that purpose, a
retirement account can provide much-needed funds.
Saving money for a retirement account takes both time and
discipline. So that one is not tempted to withdraw funds, it is important that
the retirement account is kept completely separate from regular bank accounts.
Although
some sacrifices will have to be made along the way, one can take comfort in
that by sacrificing a few small things now, they are providing for a happily
fulfilling retirement future.
Related Articles:
|
