Types of Retirement Funds
No matter where you are in your career cycle, it is never too early to start thinking about retirement. The sooner you get started with your retirement savings and investment program, the better off you will be. Depending on your employer, you might have access to a traditional pension plan or a 401k. In addition, you might be able to contribute more money to a traditional or Roth IRA.
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Defined Benefit Plans
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With a defined benefit plan, workers who have enough years on the job to be vested are guaranteed a set monthly payment for life. In some cases, those workers may be offered a lump sum pension payment instead, which they can then invest as they see fit. These plans are not portable, and if a worker leaves his job before becoming vested, he will likely derive no benefit from the plan.
Traditional IRA
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Workers can get an immediate tax break and put money aside for retirement by opening and funding a traditional IRA. With a traditional IRA, workers can deduct the amount they contribute, lowering their taxes and making it easier to save money. The catch is that holders of traditional IRA accounts must pay taxes on the money when they withdraw it in retirement. That money is taxed at prevailing rates, so if taxes go up in the future, the value of the plan could be diminished.
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Roth IRA
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With a Roth IRA, workers do not get an immediate tax break like they do with a traditional plan. What they get instead is the ability to withdraw money from the plan -- tax-free -- when they retire. The ability to create a steady stream of tax-free income makes the Roth particularly attractive for younger workers, who have decades to fund their accounts and make them grow. A Roth can also be a good deal for workers who expect future tax rates to be higher.
401k Plans
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A 401k plan is a defined contribution plan, as opposed to the defined benefit pension plans some workers have. A defined contribution plan like a 401k requires employees to take an active role in their retirement planning by putting money aside out of their paychecks. With a 401k plan, employees typically designate a percentage of their gross pay toward the plan, and that money is taken out on a pre-tax basis. That lowers the individual's taxable income, providing both immediate and long-term benefits. In some cases, the employer may also contribute money to the plan, based on the amount each worker contributes. For instance, the employer might contribute 50 cents for every dollar a worker puts in, up to six percent of that worker's gross income.
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References
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