A retirement plan is a way to set aside money for the future and avoid spending it now. Contributing to a retirement plan can help you save more, save more often, and start saving now. That gives your money more time to grow. Remember: even small amounts of savings have the potential to grow over time.
There are various types of retirement plans for both individuals and employers. Some employers offer their employees a retirement plan which can make it simple for employees to save money for the future out of every paycheck they get.
If you’re a non-working spouse or have a business of your own, there are other types of plans you can use.
To learn more, consult with a retirement planning expert.
Here are four common types of retirement plans.
A Traditional IRA is an account that holds investments you’ve made (for example, CDs, mutual funds, or stocks) to help pay for your retirement. If you have earned income, you can contribute $5,500-$6,500 a year (depending on your age), potentially tax deductible, up to age 70½. The major benefit is that the government doesn’t tax the interest you earn until you withdraw it, normally when you retire. This can help your account compound faster to give you more money at retirement.
Traditional IRAs are good investments for money you don’t need right away and can afford to invest for a period of time. If you need it before you reach age 59½ (unless it’s to buy your first home or pay education expenses) you’ll pay both a penalty fee and taxes on your withdrawal.
A second type of IRA is called a Roth IRA. To understand the differences between Traditional and Roth and to set up an IRA, it’s important to work with a banker, a financial advisor, or a retirement specialist.
Read more about Individual Retirement Account (IRA).
One common type of these company-sponsored employee retirement plans is called a 401(k) plan. According to the Internal Revenue Service (IRS), for 2018 the maximum 401(k) contribution is $18,500 if you’re younger than 50, $24,500 if you are 50 or older. While there are legal limits on how much you can contribute, you don’t have to pay income taxes on the money you contribute until you use the money when you’re retired.
If your company offers a retirement plan, study the specifics and talk with a retirement plan expert. Strongly consider investing as much as you can as soon as you can. Companies generally offer different options for you to invest the money in your 401(k). Some even offer to match your contributions. If yours does, take full advantage of it. Contribute enough to get the full match if you can. Also, take advantage of the new “catch up” provision starting at age 50 to maximize the amount of money you contribute. After all, you’re investing in your own future!
A Simplified Employee Pension Individual Retirement Plan (SEP) is designed for people who are self-employed. Funds may be invested the same way as an IRA. For 2018, a SEP allows you to contribute up to 25 percent of your business compensation up to a maximum of $55,000.
A defined benefit plan provides a specific income for retired employees, either as a lump sum or as a pension (an annual lifetime payment). The pension amount usually depends on the employee’s age at retirement, final salary, and the number of years on the job.
It’s never too early to start saving for retirement. Start saving as much as you can now at the best interest rate possible. Give your money time to grow! There may be different retirement plan options available to you. Be sure to consult with a retirement planning expert and tax advisor.
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