The American dream is to one day retire and live on an income stream generated from a retirement savings account. Many corporations provide retirement savings plans to encourage their employees to save for this future
Types of Retirement Plans
There are several types of employer-provided retirement savings plans. The most common are 401(k) plans, 403(b) plans and pensions. All of these plans provide for the saving of pretax dollars into a tax-deferred account that is fully taxable upon receipt in retirement.
Individual Retirement Arrangements (IRAs) are also popular retirement savings vehicles. Some IRAs are owned by individuals such as Traditional IRAs and Roth IRAs, while others function similar to a 401(k). Examples of employer-provided IRAs are the SEP IRA and SIMPLE IRA.
Annuities are contracts issued by life insurance companies. Deferred annuities are purchased during one's working years and are used to save for retirement on a tax-deferred basis. Traditional advice is to make maximum contributions to employer-sponsored plans and IRAs before utilizing annuities as a savings vehicle.
All monies put into the accounts mentioned above are accessible when the investor turns 59 1/2. With the exception of Roths, a 10 percent IRS penalty is typically assessed the accounts are accessed before that age. In the case of Roth accounts, direct contributions can be withdrawn at any time without penalty or tax because the money has already been taxed.
Within any of the accounts mentioned above, investors will typically purchase a number of investments. The investments are typically in stocks, bonds, real estate, cash or commodities.