Chapter 1. What are the most common retirement plans?

There are many retirement plans available through employment or as personal investments. There are pros and cons for each of the plans, some are pre-taxed (deducted from your gross pay prior to calculating your federal income tax liability), while others are post-taxed (you already paid your federal income tax on this amount). It is crucial that you take the time to understand what your company offers or discuss your individual investment with your bank or a financial planner to make sure you are getting the most of your financial planning for retirement (including deferring tax or investing using funds from your net income).

 

How to

These are some of the most common retirement plans. 

 

 

Employer-sponsored retirement plans

• • Employer-sponsored retirement plans include benefit plans such as pensions; contribution plans such as 401(k), Roth 401(k), 403(b), 457(b); and Thrift Savings Plans.  
    • 401(k) can be one of the best tools for creating a secure retirement
      • It provides you with two important advantages:
        • 1. All contributions and earnings to your 401(k) are tax-deferred
          • You only pay taxes on contributions and earnings when the money is withdrawn
        • 2. Many employers provide matching contributions to your 401(k) account
          • The combined result is a retirement savings plan you cannot afford to pass up
    • 403(b) plans are only available for employees of certain non-profit, tax-exempt organizations:
      • 501c(3) Corps, including colleges, universities, schools, hospitals, etc
      • If you are an employee of one of these organizations, a 403(b) can be one of your best tools for creating a secure retirement
        • It provides you with two important advantages:
          • 1. All contributions and earnings to your 403(b) are tax-deferred
            • You only pay taxes on contributions and earnings when the money is withdrawn
          • 2. Many employers provide matching contributions to your 403(b) account which can range from 0% to 100% of your contributions
            • The combined result is a retirement savings plan you cannot afford to pass up

Individual retirement plans

• • Individual retirement plans include traditional IRAs, ROTH IRAs, spousal IRAs, myRAs, and rollover IRAs
    • Contributing to a traditional IRA can create a current tax deduction, plus it provides for tax-deferred growth
    • While long term savings in a Roth IRA may produce better after-tax returns, a Traditional IRA may be an excellent alternative if you qualify for the tax deduction
  • Always check with your tax advisor prior to making any investments

Retirement plans for self-employed and small business owners

• • Retirement plans such as SEP, SIMPLE, and Payroll Deduction IRAs are for individuals or small business owners with employees

 

Practice

Now you know the various types of retirement plans, review each category that applies to your situation. Think of paying it forward and discuss your plans with a friend or a family member.

 

Congratulations! You can move on to Chapter 2. What is the difference between traditional IRA and ROTH IRA?

To review the full module on Retirement planning, click here.