Retirement planning can be a daunting task, especially if you're not sure where to start. There are a lot of different retirement plans out there, and it can be hard to know which one is right for you. In this blog post, we'll explain the difference between four of the most common retirement plans: 401(k), Roth IRA, traditional IRA, and pension plans.
A 401(k) is a retirement savings plan offered by many employers. With a 401(k), you can contribute a portion of your salary before taxes are taken out. This means that your money grows tax-deferred, which can save you a lot of money on taxes in the long run. There are also often employer matching contributions, which means that your employer will contribute money to your 401(k) account, too. The current limit for the amount that an employee can contribute to their 401(k), in 2023, is $22500, which works out to a maximum of $1,875 a month. Contributing to one of these lowers your taxable income when you make the contribution, and delays the payment of taxes on the contributions or the gains they generate until you withdraw.
A Roth IRA is a type of individual retirement account (or “arrangment”). With a Roth IRA, you can contribute after-tax dollars. You pay taxes on the money now, and the money is then allowed to grow, tax-free, and be withdrawn later. This can be a good option if you think your tax rate will be higher in retirement than it is now.
A traditional IRA is another type of individual retirement account. With a traditional IRA, you can contribute pre-tax dollars. However, your money grows tax-deferred and you will have to pay taxes on your withdrawals in retirement. This can be a good option if you think your tax rate will be lower in retirement than it is now. The limit on annual contributions to Roth and traditional IRAs is $6,500 a year for anyone under 50, and $1,000 on top of that for anyone 50 or older (to compensate for delays in investing, and to allow older investors to play catch-up, as seen here).
A pension plan is a retirement plan that is funded by your employer. With a pension plan, you will receive a monthly income in retirement. The amount of your pension will depend on your salary and how long you worked for your employer. These aren’t nearly as common as IRAs or 401(k)s anymore, because changes in the tax code in the 1980s made it more favorable to businesses to shift the burden of retirement planning and investing to their employees instead of carrying it themselves. If your employer helps you out, it’s probably by matching a certain percentage of the amount you contribute-- free extra money, essentially-- to your 401(k).
There are other plans, specifically designed for teachers, people who work in local government, small business owners, and employees of those small businesses. But these plans which we’ve covered, which are available through big corporations, are the most commonly discussed, so we limited our discussion to those.
So, which retirement plan is right for you? It depends on your individual circumstances. If you're not sure which plan is right for you, talk to a financial advisor, especially one who is a fiduciary, and is therefore bound by law to give you the advice that is in your best interest. They can help you understand the pros and cons of each plan and choose the one that's best for you.
A 401(k) is a retirement savings plan offered by many employers. With a 401(k), you can contribute a portion of your salary before taxes are taken out. This means that your money grows tax-deferred, which can save you a lot of money on taxes in the long run. There are also often employer matching contributions, which means that your employer will contribute money to your 401(k) account, too. The current limit for the amount that an employee can contribute to their 401(k), in 2023, is $22500, which works out to a maximum of $1,875 a month. Contributing to one of these lowers your taxable income when you make the contribution, and delays the payment of taxes on the contributions or the gains they generate until you withdraw.
A Roth IRA is a type of individual retirement account (or “arrangment”). With a Roth IRA, you can contribute after-tax dollars. You pay taxes on the money now, and the money is then allowed to grow, tax-free, and be withdrawn later. This can be a good option if you think your tax rate will be higher in retirement than it is now.
A traditional IRA is another type of individual retirement account. With a traditional IRA, you can contribute pre-tax dollars. However, your money grows tax-deferred and you will have to pay taxes on your withdrawals in retirement. This can be a good option if you think your tax rate will be lower in retirement than it is now. The limit on annual contributions to Roth and traditional IRAs is $6,500 a year for anyone under 50, and $1,000 on top of that for anyone 50 or older (to compensate for delays in investing, and to allow older investors to play catch-up, as seen here).
A pension plan is a retirement plan that is funded by your employer. With a pension plan, you will receive a monthly income in retirement. The amount of your pension will depend on your salary and how long you worked for your employer. These aren’t nearly as common as IRAs or 401(k)s anymore, because changes in the tax code in the 1980s made it more favorable to businesses to shift the burden of retirement planning and investing to their employees instead of carrying it themselves. If your employer helps you out, it’s probably by matching a certain percentage of the amount you contribute-- free extra money, essentially-- to your 401(k).
There are other plans, specifically designed for teachers, people who work in local government, small business owners, and employees of those small businesses. But these plans which we’ve covered, which are available through big corporations, are the most commonly discussed, so we limited our discussion to those.
So, which retirement plan is right for you? It depends on your individual circumstances. If you're not sure which plan is right for you, talk to a financial advisor, especially one who is a fiduciary, and is therefore bound by law to give you the advice that is in your best interest. They can help you understand the pros and cons of each plan and choose the one that's best for you.
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