401K and IRA Retirement Plans
How to Retire Wealthy
What will retirement hold for you? 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 IRA retirement plan offer you the opportunity to retire wealthy.
The question isn't at what age I want to retire, it's at what income. ~George Foreman
Four Fast Steps to a Good Retirement Plan
Here are the four steps to a golden retirement plan.
- Step 1. Choose your retirement plan from one of these three retirement plans, a 401(k), Roth or conventional IRA plan.
- Step 2. Decide how you want to invest your retirement savings. The usual choices are stocks, bonds, certificates of deposit, mutual funds or stock index funds.
- Step 3. Choose a financial institution. Tell them you want to set up a Roth or an IRA account.
- Step 4. Mail your first contribution check along with the completed application.
Don't simply retire from something; have something to retire to. ~Harry Emerson Fosdick
Social Security Is Part of Your Retirement Plan
Social Security benefits are part of your retirement plan. But you will definitely need more than Social Security to support you 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. But Social Security benefits are being changed. Your Social Security benefits will not be enough to support you.
The Miracle of Compound Interest for Retirement Plans
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.
Retire from work, but not from life. ~M.K. Soni
Your three Retirement Plans, 401(k), Conventional IRA and Roth IRA
You have three retirement plans to use when you plan for retirement. Each of these plans offers you a tax break on the money you invest. These retirement plans are called the 401(k) retirement plan, the Conventional IRA retirement plan and the Roth IRA retirement plan.
How to use the 401(k) Retirement 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. Your employer will withhold your retirement savings from your paycheck, and send it 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. There is a restriction on the employer's contribution. What you put into your 401(k) belongs to you, now and always, even if you change jobs. 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. After age 59, when you withdraw money from your 401(k) retirement plan, 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 doesnt match your contribution, then use the personal IRA retirement plan first. When you have contributed the maximum to your personal IRA retirement plan, and you want to contribute more for retirement, your company 401(k) retirement plan has a higher contribution limit.
What Is a Roth IRA Retirement Plan?
If your employer does not match your contribution to the company 401(k), the Roth IRA retirement plan is your best retirement strategy. 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 is a huge tax incentive. 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. In 2007 the limit is $4,000 and in 2008 the limit is $5,000. If you are 50 years old, or older, your contribution limits are increased to $5,000 in 2007 and $6,000 in 2008.
After age 59, you can withdraw 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 there is income tax and a penalty to pay on the earned interest and profit you withdraw before reaching retirement age.
What Is a Conventional IRA Retirement Plan?
The conventional IRA retirement plan is another plan for retirement savings that offers an income tax incentive, too. It was set up years before Congress made the Roth IRA retirement plan available. You set up your own conventional IRA retirement plan. You will get an income tax credit every year 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.
Financial analysts agree that the Roth IRA retirement plan offers more tax benefits than the conventional IRA retirement plan for almost everyone.
How to set up a Roth IRA 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, T. Rowe Price, Fidelity, and Scottrade. Call or go online and ask for an application. 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.You always have the option of moving your Roth IRA retirement plan money to other investments later. 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.
I hope life brings you much success.
I wish you a very happy day.
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