ROTH IRA: An Individual Retirement Account (IRA)
is a retirement plan account that provides various tax
advantages for retirement savings in the United States
of America. In a Roth IRA, contributions are made with
after-tax assets. All transactions within the IRA do
not have a tax impact, and withdrawals are usually
tax-free. The Roth IRA is named after United States
Senator William Roth.
Traditional IRA: An Individual Retirement Account
(IRA) is a retirement plan account that provides
various tax advantages for retirement savings in the
United States of America. In a Traditional IRA,
contributions are often tax-deductible, and most often
simply described as contributions are made with
pre-tax assets, or that it is money deposited before
tax. All of the transactions and earnings within the
IRA don't have any tax impact, and withdrawals at
retirement are taxed as income, with the exception
being for those portions of the withdrawal
corresponding to contributions that were not deducted.
Annuities: Annuities are contracts between you and
your insurance company, under which you make a
lump-sum payment or series of payments. Annuities
typically offer tax deferred growth of earnings and
might include a death benefit that will pay your
beneficiary a guaranteed minimum amount, such as your
total purchase payments. In return, the insurance
company agrees to make periodic payments to you
beginning either immediately, or at a later future
401k: A 401(k) plan is offered by some employers in the United States to defer money for retirement. Contributions and earnings in a 401(k) plan are not subject to federal and most state income taxes until the funds are withdrawn. A 401(k) plan allows you to save money on a pretax basis, and most employers will contribute matching funds making a 401(k) plan more lucrative. In addition, the money that is accumulated in the plan earns interest and grows tax-deferred. You are only taxed on the money you withdraw from the plan later as ordinary income. Your contributions are deducted from your paycheck before taxes are withheld. It depends on your tax bracket, but the pretax deduction is like getting an increased return on your investment. When you retire you will pay tax on the money you withdraw, but typically be in a lower tax bracket. If the company you work for matches, it's like getting a pay increase. Before your 401(k) plan even earns interest, you already have a 100 percent increase if your employer matches your contribution dollar for dollar. Your company will have a vesting schedule so you know when you will become vested. The vesting schedule shows how much of the matching contributions and earnings on those contributions you own during your employment. If you leave the company before you are fully vested, you will lose some of the money in your account. You may begin withdrawals from your 401(k) plan as early as age 59½ without penalty. The law mandates that you must begin account withdrawal by the age of 70 ½. You can defer this withdrawal rule if you are still a full time employee with the company sponsoring your 401(k). You are also exempt from this penalty if you are over age 55 and have been permanently disabled. If money is withdrawn from these accounts before reaching age 59 ½, the IRS will issue a 10% early withdrawal penalty.
Top 5 reasons why you should participate in a 401(k) plan
1. Most Employers will match 401(k) contributions dollar for dollar up to a certain percentage. If you should lose or change jobs, the money in your 401(k) can be rolled over to an Annuity or IRA. Changing jobs doesn't mean you must cash in or lose your 401K, but because your employer may match your contribution, you could be subject to their vesting rules.
2. Contributions are made before taxes are taken out. You aren't responsible for income tax on your contributions until the money is withdrawn.
3. It makes saving and investing money easy. You don't miss the money because contributions are automatically deducted from your paycheck forcing you to save consistently. Your employer will offer a choice of funds that your money is invested in. You choose the investment options from aggressive to moderate to conservative.
4. 401(k) contributions may place you in a lower tax bracket resulting in increased tax savings.
5. You choose the amount you want to contribute in your 401(k). You contribute the amount you can afford, up to the maximum allowable by law.
Disclaimer: Insurance coverages and discounts are subject to availability and qualifications. Other terms, conditions, limitations, and exclusions may apply.