Start An IRA 401k
Start An IRA 401k
For the purposes of this particular article on retirement planning, I want to focus on those who would like to start an IRA or 401k.
Firstly an IRA (individual retirement account)
For many people, these are a very good option for saving towards retirement. An IRA is an account type that has certain tax characteristics. Because the US government encourages its citizens to save for retirement, certain tax advantages are experienced within an IRA. However, there can be penalties if you don’t use an IRA for its intended purpose. More on the pros of IRAs in a moment.
Anyone who works can have an individual retirement account(IRA) . The employer in this case, unlike the 401(k) plans, has no role to play with this account. It is opened and maintained by the individual, hence the title, and more often than not would be opened with a investment company. The normal annual contributions cap is $2,000 although this cap may be lower if you have a retirement plan at work or your income reaches certain limits. One thing which an IRA does have in common with a 401(k)is the age at which one can withdraw funds without incurring a penalty which in both the cases is 59yrs and 6mths.
As mentioned above, there are a couple of nice advantages with an IRA.
In terms of spousal accounts, if you have employment but your spouse does not, you can contribute up to $3,000 of your income to a spousal IRA for him or her.
A further plus point is that there is no minimum age limit for starting an IRA. If your 15-year-old son has compensation from working in the family business you can pay up to the limits in an IRA.
On to the 401k.
A 401(k) is a retirement plan sponsored by employers and is grouped into two categories – Defined Contribution and Defined Benefit. The least complicated is the former where you are allowed to make your own contribution and your employer may also make matching contributions of a percentage of your input.
The latter pension plan is much better for you the employee. In this case the employer promises to pay a defined amount to retirees who meet certain criteria. It links the benefit to the amount of service and is based on the final average salary.
Here are a couple of advantages to 401(k) plans:
1. Unlike a pension, if a participant changes jobs, all contributions can be moved from one company’s plan to the next company’s plan (or to an IRA)
2 If your company matches your contributions, it’s like getting extra money on top of your salary.
And a couple of disadvantages:
1. It is expensive to access your 401(k) savings before age 59 1/2.
2. Employer-matching contributions do not become the property of the employee until a number of years have passed. The rules say that employer- matching contributions must vest according to one of two schedules, either a 3-year “cliff” plan (100% after 3 years) or a 6-year “graded” plan (20% per year in years 2 through 6).
To conclude, both IRA and 401(k) plans are generally very popular and an excellent means of planning for your retirement. As with all forms of investment however, you need to watch your portfolio very carefully and it is always recommend to seek the advice of a financial advisor.
If you would like to start an IRA or 401k and seek further advice or information, visit http://www.planning-your-retirement.com/retirement-planning.html for all your retirement planning needs.