There are many different approaches you may take for planning ahead for your retirement, and building your nest egg takes time, patience and above all, strategy. Let’s go over the main financial vehicles for retirement planning and how they work, to better decide which route is best for you.
Government-Sponsored Vehicles
The US provides legal framework to build retirement saving plans that have tax saving advantages. There are usually limits in how much you may contribute, as in what percent of a paycheck or what your company may match. Also, there are age restrictions in terms of what age you have to be in order to remove money. If you prematurely withdraw money, you will most likely be taxed.
401(k)
A 401k is a voluntary investment plan opportunity provided by companies to their employees. This plan allows you to choose a percentage of your paycheck pre-tax to go into an account; you do not have to claim the portion of income you route to your 401k as employment income for the year it is earned. The funds will also not be taxed unless removed from your account. Check with your employer and see what kind of plan they have to offer you.
IRA
An IRA (Individual Retirement Account) is a retirement savings account that allows an individual to make an annual contribution of employment income, up to a specified maximum amount. This is similar to a 401k – your deductible IRA contributions can lower your taxable income, and capital gains are tax-deferred until you begin withdrawing your funds as income.
The rules and contributions are contingent to your income bracket (as well as other factors). By postponing taxation on funds you contribute to your IRA, you will be taxed later on and you may be taxed less.
Company Pension Plans
Your company may devise its own retirement plan and perhaps work with you on tailoring a plan option that best suits you. A defined-contribution plan can be a money-purchase pension plan (in which only your employer makes contributions) or a profit-sharing plan (a 401k plan where you contribute a portion of your paycheck, and your employer may also make contributions). Your company may either match the funds in your 401k or IRA when you retire, as well as offer you stake in the company.
As you can see, there are a variety of ways to go about building your nest egg. It’s highly advised to discuss all your options with a financial advisor in order to help get you on track in pursuing smooth ride to retirement.
Sources:
http://www.investopedia.com/university/retirement/retirement4.asp
