Money to Retire Rich from Your Roth, IRA and 401k Retirement Plans
What will retirement hold for you? Will you have money to retire rich and enjoy foreign travel, golf, fishing, and long walks on the beach? Or will you spend your golden retirement years trying to live off a skimpy Social Security check? Now is the time to plan for a successful retirement. The 401(k) retirement plan and the Roth IRA retirement plan offer you the opportunity to retire rich.
A retirement plan is a personal savings plan that gives you tax advantages when you save money for retirement. Save money every year and watch it grow tax-sheltered. Whatever your retirement money earns in the plan is tax-free. Many people of ordinary means can retire rich. You can use your retirement plan to invest in stocks, bonds, CDs - Certificates of Deposit, mutual funds and many other financial assets. And as your savings grow and compound each year, your money grows exponentially faster. So, if you start young and save money regularly for retirement, you really can retire rich.
There are three retirement plans widely available. These are the
Financial analysts agree that the Roth IRA retirement plan offers more tax benefits than the traditional IRA retirement plan for almost everyone.
And if your employer matches your savings in the company 401k retirement plan, be sure to join the 401k at work to take advantage of the money. 401k plans also have a higher contribution limit than the other plans.
- 401k Retirement Plan at your work
- Roth IRA Retirement Plan
- Traditional IRA Retirement Plan
The question isn't at what age I want to retire, it's at what income. ~George Foreman
How a Retirement Plan Can Make You Rich
You should start your retirement plan soon if you want money to retire rich, so that your savings have time to earn more money for you. Time is on your side if you start early to save for retirement. The miracle of compound interest has plenty of time to work in your behalf. It happens like this. If you save $1,000 and invest it at 10% interest, at the end of the first year, youll have $1,100. Not very impressive, huh? After the second year, your $1,000 grows to $1,210, because your interest also earns more interest. In 10 years your $1,000 will grow to $2,593.74. That's more interesting. But after 30 years, your $1,000 will reach $17,449.40, without any work on your part. That is the miracle of compound interest. Even though it's hard to scrape up $1,000, to invest it and to leave it untouched for 30 years, the numbers can be very motivating. Imagine what marvelous things will happen if you save $1,000 every year.
Save Money to Retire Rich With a 401k Plan
A 401(k) is a retirement plan offered through your employer. If you work for a non-profit organization, your employer's retirement plan is called a 403(b). The plans are named after sections in the federal tax code. The money you save to retire rich will grow and compound earnings tax free.
Your employer will withhold your retirement savings from your paycheck, and send the money to your account in the company 401(k) retirement plan. When your 401(k) contribution is deducted from your paycheck, there is no income tax withheld on the money. The rest of your pay is taxed as usual, but not your 401(k) contribution. So, if you are in the 15% tax bracket, you are saving 15% on the money you contribute to the 401(k) retirement plan.
There's more good news. Many employers will make a matching contribution to your 401(k) savings. That's another reason to use the 401(k) retirement plan. What you put into your 401(k) belongs to you, now and always, even if you change jobs. But there is a restriction on the employer's contribution. What the employer contributes becomes yours after a period of time, maybe after 5 years or 10 years at the company. When you finally own the employer's contribution to your 401(k) retirement plan account, we say that the money is vested.
The 401k retirement plan has a valuable income tax benefit, because you pay no income tax on the money you save and the money your savings earn. After age 59, you can withdraw money from your 401(k) retirement plan. At that time you have to pay income tax on it, because, after all, you didn't paid any tax on the money you contributed or the money earned.
If your employer matches your 401(k) contribution, take full advantage of it. If your employer doesn't match your contribution, you should set up a Roth IRA retirement plan for yourself. Make your savings contributions to your Roth IRA retirement plan until you reach the annual limit. If you want to save even more for retirement, contribute additional savings to your company 401(k) retirement plan. Your company 401(k) retirement plan has a higher contribution limit than your Roth IRA retirement plan.
Save Money to Retire Rich with a Roth IRA Plan
The Roth IRA retirement plan is your best retirement strategy to retire rich if your employer does not match your contribution to the company 401(k). You personally set up the Roth account in your own name and save money in it. There is no income tax benefit when you make your contributions to your Roth retirement plan. But there are two huge tax incentives. The money you save to retire rich grows and compounds earnings tax-free. When you retire, you will not pay income tax on any of the money you withdraw. Your Roth account earns money tax-free for you!
You can start your Roth IRA retirement plan with as little as $500, and you can make contributions whenever you are able. However, there is a limit on how much you can contribute to your Roth every year. For the year 2009, you can contribute up to $5,000 to your Roth IRA retirement plan. If you are age 50 or older you can contribute $6,000.
After age 59, you can withdraw all the money tax-free from your Roth retirement plan. Before retirement age, you can withdraw the amount of your contributions without paying income tax or a tax penalty. But if you withdraw before reaching retirement age, there is income tax and a penalty to pay on the earned interest and profit you withdraw. Another advantage of a Roth IRA retirement plan is that there are no required withdrawals at any age.
The Roth IRA is for people of moderate income. If you earn too much in any year, you cannot make a contribution to a Roth IRA in that year. For example, you cannot make a Roth IRA contribution for 2009 if on your income tax return your modified AGI is $176,000 or more. Single taxpayers cannot make a Roth IRA contribution for 2009 if on your income tax return your modified AGI is $120,000 or more. There are other rules like these for high-income earners.
Save Money to Retire Rich with a Traditional IRA Plan
The traditional IRA retirement plan is another savings plan if you want to retire rich. It was set up years before Congress made the Roth IRA retirement plan available. We recommend you use the Roth rather than the traditional IRA. But you can set up your own traditonal IRA retirement plan. You will get an income tax credit every year on your tax return for the amount of the contribution you make to the plan. The money you contribute to the IRA retirement plan and the earnings of the plan always belong to you. However, the money you withdraw from your IRA retirement plan after age 59 is subject to federal income tax, at whatever tax rate is in effect then. If you take the money out of your IRA Retirement Plan before the retirement age of 59, there is generally a 10% tax penalty to pay, unless you qualify for an exception to the penalty. When you reach age 70 and 1/2, you must make withdrawals from your traditional IRA retirement account.
Retire from work, but not from life. ~M.K. Soni
3 Simple Steps to Set Up Your Retirement Plan
Here are the three steps to start your Roth IRA retirement plan.
- Step 1. Decide how you want to invest your retirement savings. The usual choices to invest your savings are stocks, bonds, certificates of deposit, mutual funds or stock index funds. Some people invest their retirement savings in a S&P500 index fund, which is a type of mutual fund.
- Step 2. Contact a financial institution. Tell them you want to set up a Roth or an IRA account. You may want to use an online stock broker like TDAmeritrade. You may want to use a mutual fund family like Vanguard.
- Step 3. Complete the application for the Roth IRA account. Mail your completed application along with your first contribution check.
What financial institution should you use for your retirement plan? You can open a Roth IRA retirement plan account at many financial institutions, but your best choice is to contact a bank, a no-load mutual fund company, or a discount brokerage. Reliable companies include Vanguard, TDAmeritrade, Fidelity, and Scottrade. Call or go online and ask for an application, and ask what fees they charge. After the account is open, you can choose how you want the retirement plan money invested. You can choose from many investments, including Certificates of Deposit, money-market funds, no-load mutual funds, bonds and stocks. In your Roth IRA retirement plan, you always have the option of moving your retirement savings from one investment to another as you wish. You can also move your Roth IRA retirement plan account to another institution from time to time. This is called a rollover.
To summarize the strategy for your financial retirement plan, put as much in the 401(k) plan at work as your employer will match. Contribute the maximum allowed to your Roth plan every year if you can. And if you can save even more, put it into your 401(k) retirement plan at work. Don't forget you can save as much as you want for retirement without a retirement plan, even though you get no income tax benefit.
Don't simply retire from something; have something to retire to. ~Harry Emerson Fosdick
You Can't Retire Rich on Social Security
You will be eligible for Social Security benefits when you reach retirement age. But you will definitely need more than Social Security to live on during retirement. Every time you get a paycheck you contribute to Social Security. The amount shown as the FICA deduction on your paystub is your contribution to the federal Social Security program. Every payday your employer also makes a contribution to Social Security for you, an amount equal to your own contribution. The amount of these contributions to Social Security determines how much you will receive after retirement. But Social Security benefits are being changed. Your Social Security benefits will not be enough to support you.
I hope life brings you much success.
The Retirement Coach
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