Submitted by: G. White

It used to be many years ago that retirement plans meant getting the pension your company gave you along with your social security payments from the government and any savings you have on your own, and living comfortably in a downsized apartment throughout your golden years. For some this type of financial plan is sufficient for their needs; they may have a well-funded pension from a corporation that will provide well for them. But for most, you will need to make your own retirement plans when it comes to your financial health in order keep yourself afloat financially, and to make those dreams you’ve had for retirement a reality. It’s of course easy to get overwhelmed with the many options that are available to you when it comes to financial retirement plans, and you should speak to a financial advisor or counselor when making these decisions if you still have questions, but we can give you some general information that will explain some of the details a bit more clearly.

Defined Benefit Retirement Plans

Defined benefit retirement plans as provided by employers guarantee a certain payout upon your retirement, which depends on the retiree’s previous salary and the number of years he or she has been contributing to this plan. These may be referred to as funded meaning that there are contributions from one’s employer and sometimes from the plan members. In unfunded retirement plans, there are no funds set aside but the benefits are paid out of current taxes and social security contributions.

401(k) Retirement Plans

A 401(k) allows a person to save for retirement while deferring the taxes to be paid on the funds in the plan until they are actually paid out. Some are what are called participant directed, meaning the worker may decide on the investment options for the funds that are set aside to fund the 401(k). They may opt for stocks, bonds, money market accounts, or a mix of all of these. Most of these retirement plans also allow an employee to purchase a portion of company stock as part of this investment portfolio. These are the most common types of 401(k) plans; in trustee directed plans, which are much more unusual, the employer would appoint a trustee to oversee all the investment decisions of that plan.

Roth IRA Retirement Plans

One of the main characteristics of a Roth IRA is that the money put into this retirement fund has already been taxed as income; therefore, when the money becomes available to the retiree he or she does not pay taxes on it at that time. In contrast to a traditional IRA, contributions to a Roth IRA are not tax-deductible. This may not be advantageous to some who are in a higher tax bracket and expect the contributions to their retirement plans to help with the tax bill. At any time, the Roth IRA owner may withdraw up to the total of their contributions without tax or penalty. There are income limits for those who want to contribute to a Roth IRA.

Traditional IRA Retirement Plans

In a traditional IRA, the account is held at a bank or brokerage house, and may be invested how the custodian for the plan allows. There are no income provisions for a traditional IRA, but there are more restrictions when it comes to early withdrawal. Since the dollars funding the IRA have not yet been taxed, they are subject to federal taxes upon withdrawal.

The main advantage to traditional IRA retirement plans is that their contributions are tax deductible. This has definite advantages for someone during the year of the contributions. However, a Roth IRA typically offers more shelter on one’s assets than a traditional IRA.

Choosing Between the Retirement Plans

No one can tell you what the best choice is for you; even your financial advisor can only give you all the relevant information on how the different retirement plans affect your money and its potential growth. It’s up to you to decide which option you’re more comfortable with. Some people want to make their own decisions about where their money is invested and some would rather leave the decisions to others; some would prefer to pay the taxes on their contributions now while others would prefer to wait until the funds are disbursed. You need to educate yourself thoroughly and then make the decision that works best for you.

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