By Bill Broich
Retirement can be a scary thing. There is a certain frightening urgency attached to it that makes everyone panic. The fact that you have to start planning at a younger age does not help and it can be very easy to get overwhelmed and make a bad decision regarding your financial future. But it doesn’t have to be so intimidating once you know the options before you and their benefits. When it comes to retirement you have two big choices to make about how you are going to take care of your nest egg. Finding a retirement plan is not hard, they’re everywhere. However the process is obtuse, complicated and not enough people talk about it. It can be intimidating to go through your whole life never really learning what an IRA is and then suddenly having to find one.
Once the information is out there, people will be able to make the decision that is right for them and their loved ones with little to no confusion. This article is designed to educate and review retirement plans to help make you aware of the different options and decide which one is right for you, and what you qualify for.
There are several options that will help you hang on to the money that you will need later in life. Each of these plans has positives and negatives that you as a future retiree need to take into account before you make a decision.
- A 40l(k) is a tax-qualified pension that allows retirement plans to be provided or matched by an employer. The participant’s contribution is taken from the employees’ paycheck in small portions over the course of their career, before taxation. The benefits of a 401(k) is a reduced taxable income, because your contributions come out of your pay before taxation takes place. And this saved money will compound more quickly than if it were being taxed because the plan is tax deferred. If your contributions are matched, then you are essentially being given free money. However, it is not advisable to take money of your 401(k) before retirement, as it is very expensive and the IRS can levy penalties is withdrawn prior to age 59 1/2. You often have to pay back loans with your after-tax money and interest, and you’ll have to pay a 10% penalty, all while you could’ve been saving money for your retirement.
- An IRA or an Individual Retirement Account is a retirement plan allowed by congress and designed as an individual financial plan. There are several types of IRA, including the traditional model and the Roth model. A traditional or deductible IRA provides tax-deferred growth and deductible (generally) contributions until retirement withdrawals, while a non deductible IRA means that your contribution to your retirement fund can not be deducted from your taxes but your savings will grow tax-deferred. Roth accounts do not allow deductible contributions but your withdrawals will be tax-free after a waiting period of 5 years. No matter what kind of IRA you choose they provide tax advantages and benefits to you as a future retiree. An IRA can act as an augmentation for your retirement plan and other retirement accounts. Many experts will recommend the Roth model rather than the traditional or nondeductible for funds planned to be held for longer terms until retirement. The Roth account is preferred by retirees overwhelmingly, generally because of its flexibility, lack of mandatory withdrawals and more options for penalty free withdrawals before retirement.
The right decision general falls where you qualify, if you qualify for a Roth then consider its benefits and disadvantages, if not then a traditional IRA could be the logical choice. Overall though, your best option, in general would be to have both a 401(k) from your employer and an IRA that way they can compliment and build on each other, accumulating the money that you need more quickly with fewer drawbacks.
Providing you with the safety and security you need and eliminating the stressful non-stop worrying that is often accompanied by searching for a retirement plan. Hopefully, this guide on what you can expect has helped ease the transition for you just a little bit. Preparing for Retirement is not hard, it is just complicated, when you’ve got all the information and the choice is yours to make, then it all becomes much easier and you are quickly on the road to a safe and financially secure future.
Many pre-retirees plan to transfer their 401 (k) to a self-directed account (IRA) and then use a fixed indexed annuity as the actual vehicle to provide the retirement income stream. This allows for a guaranteed retirement fund free form investment or market worry.
Before making any final decision, make sure you fully understand how each of these plans work and make sure their advantages and disadvantages match up with your goals.