Guide to Retirement Funds

Build a retirement nest egg.

In this age of shrinking pensions and the uncertainty surrounding Social Security, it has never been more important for every worker to save for a comfortable retirement. Fortunately workers have a number of retirement plan options at their disposal, including both employer-based and personal savings options.

401k Plans

If you work for a private for-profit company, that firm might offer you a 401k plan. When you sign up for your employer's 401k plan, you choose to deduct a set percentage of your pay from each paycheck and invest it in the 401k plan. Once the money is withdrawn from your paycheck, you choose how you want it to be invested. Most 401k plans include a number of different options, including stock funds, bond funds and money market options. Many employers make their plans more attractive by offering to match a portion of the money their workers put into the plan.

403b Plans

A 403b plan works much the same way as a 401k plan. The main difference is that 403b plans are used by public entities like schools, hospitals and government agencies. Like 401k plans, your employer might offer to contribute extra money to your 403b plan to match some of what you put aside. The contribution limits are the same for both 401k and 403b plans, at $16,500 for 2010 and 2011. Workers 50 years of age and older can contribute an extra $5,500 for a total of $22,000.

Traditional IRA

If you contribute to a traditional IRA, you can enjoy an immediate tax break because the money you put aside can be deducted on your tax return. That can make it easier to save for retirement if you are strapped for cash, since the money you save in taxes can allow you to save more for your retirement. The money you put aside in a traditional IRA can grow and compound all the way to retirement. You only pay taxes on that money when you take it out to provide retirement income.

Roth IRA

A Roth IRA is an attractive option because it allows workers to withdraw money from their accounts tax-free in retirement. This tax-free treatment can be very attractive, particularly for younger workers with decades to go before retirement and for workers who expect to be in the same or a higher tax bracket when they retire than they were during their working years. If you have a significant amount of retirement assets built up outside your IRA, you could well generate more income when you retire than you did when you were employed. If that is the situation then a Roth IRA can be the best choice.

References

• CNN Money: What's the Difference Between a Traditional and a Roth IRA?
• CNN Money: 401k and 403b Plans