Are You Taking Advantage of the Right Retirement Plan?
Choosing the right retirement plan for you
Choosing the perfect retirement plan for you can be a confusing path. With so many plans and options to choose from, how do you know which one is right for your situation? Don’t worry, We’ve Got Your Back™. Below, you’ll find a breakdown of some of the most popular retirement plans to help you gain a better understanding of the different retirement options that might be right for you.
Individual Retirement Account (IRA)
An Individual Retirement Account, better known as an IRA, can be looked at as your personal savings plan for retirement. There are two types of IRAs: traditional and Roth. Both help you save money on your schedule, and have tax advantages!
Besides the name there are a few factors that distinguish a Roth IRA from a Traditional IRA. One of the main differences is in a Roth IRA you pay taxes prior to investing your money. This means that once it’s time for you to begin withdrawing money for you retirement account, you won’t have to pay taxes on what you take out. Another difference: there are no age restrictions on Roth IRAs. You can continue making contributions to your IRA once you retire, and you won’t need to start taking minimum required distributions when you’re over 70 ½.
There are certain income limitations when opening a Roth IRA; contact one of the Credit Union’s Financial Advisors to see if you qualify.
If your current employer offers a 401(k) plan, you may want to jump on the band wagon as soon as possible. Names after a section of legal code, a 401(k) is a private, employer-sponsored retirement plan.
To put it simply, 401(k) is almost like your employer handing you free money. A 401(k) works by you telling your employer what percentage of your paycheck you would like to go into your account. Once this is setup, the funds will automatically be deducted from your paycheck and placed into your 401(k).
Most of the time, your employer then matches a certain percentage (usually between 3-6%) for what you contribute to your 401(k)…free money!
Your employer may offer a traditional 401(k) and/or a Roth 401(k). As with traditional and Roth IRAs, the main difference is in when you pay the tax. With a traditional 401(k), once you begin to make withdraws from the account for retirement you will have to pay income taxes on gains and contributions. While with a Roth 401(k), you pay income taxes up front.
One detail you may want to consider when deciding if a 401(k) is right for you is vesting. Some companies have what is known as a “vesting schedule;” this is where your employer contributes to your account, but you need to stay with the company for a certain amount of time before the money becomes fully yours. If you leave before then, you get to keep the amount that you contributed, but forego your employer’s contribution.
IRA and 401(k) accounts are designed in a way to incentivize retirement savings; that’s why they offer such great tax benefits. It sounds great, but that carrot comes with a stick. If you decide to borrow against or withdraw money from your 401(k) or IRA before retirement, you could face significant tax penalties. However, there are certain exceptions, like buying your first home, for which you’re allowed to take early withdrawals without a penalty. The rules are complicated, so one of the Credit Union’s Financial Advisors before withdrawing.