Savings Plans for Retirement
With traditional defined benefit pension plans shrinking, it has never been more important for every worker to take advantage of available retirement plans. Contributing to a retirement plan can help you save money on current taxes while allowing you to build the nest egg you will need when those paychecks stop.
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401(k) Plan
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If you work for a private employer, you might have access to a 401(k) plan. A 401(k) plan is designed to help workers save for retirement. When workers contribute to a 401(k) plan, the amount withheld is deducted from their taxable income, and that can reduce their taxes significantly. In addition to these tax-saving benefits, many employers match the contributions.
403b Plan
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A 403(b) plan is similar to a 401(k) plan, with the main difference being the type of employer that offers the plan. While 401(k) plan are offered by private employers such as major corporations and some small businesses, 403(b) plans are offered by public entities such as hospitals, schools and governmental agencies. As with 401(k) plans, the money workers put into their 403(b) plans is deducted from their taxable income, providing tax savings along with the opportunity for growth.
Traditional IRA
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A traditional IRA is a good choice for taxpayers who expect to be in a lower tax bracket when they retire. When you put money into a traditional IRA, you get an immediate tax break for the amount you put in. That immediate tax break can be valuable, especially if your current tax rate is higher than your tax rate in retirement. When you do retire and start taking money out, you need to pay taxes on those withdrawals at your ordinary income tax rate.
Roth IRA
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With a Roth IRA, you give up the immediate tax break you get with a traditional plan. But in exchange, you get the ability to withdraw the money tax-free when you retire. The ability to generate a steady stream of tax-free income in retirement is one of the primary advantages of a Roth IRA. This tax-free growth make Roth IRA account specifically well-suited to younger workers and those who expect tax rates to be higher in the future than they are now. Roth IRA accounts are also good vehicles for high-growth investments, because the money they generate is free from federal income taxes.
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References
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