Choosing a retirement plan often is overwhelming. Your employer may have options for you, but your bank representative may also tell you she can set something up, or maybe you're self-employed and you feel need some advice. There always is a solution to every situation. Take advantage of just one retirement vehicle or several, depending on how much money you have to put aside. It never is too early or too late to start saving.
An employer-sponsored 401(k) provides a way to defer paying your money to you as a means of saving for retirement. The money then is invested into whatever the employee requests (stocks, mutual funds and so forth). Most companies will match at least part of what the employee contributes, although there is a vesting schedule to help protect the company. If you quit before you are fully vested, you may not get all of the matched funds. Tax is paid at the time of disbursement.
A 403(b) annuity is very similar to a 401(k) except the employee must work for a public school or college, or a non-profit organization with 501(c)(3) status. It also is subject to a vesting schedule.
Individual Retirement Account (IRA)
There are two main types of IRAs: traditional and Roth. Choosing between the two will depend upon which tax bracket you are in now and which tax bracket you expect to be in at retirement age. A traditional IRA is tax-deductible upon contribution but you will pay taxes on it upon withdrawal. A Roth IRA is not tax-deductible now but you will not pay taxes on it later, either. There are numerous calculators online to help you make a decision (see Resources). Note that you may convert a traditional IRA to a Roth IRA if you change your mind. Another type of IRA is called a SIMPLE and is done through payroll deduction. The company may or may not match a portion and it is not subject to a vesting schedule.
A pension also is called a defined benefit plan. This usually requires a person to work for a company for many years, with the employee being fully vested after a certain period of time. If he is fully vested after 10 years, he may be partially vested after only 7 and will collect a partial pension if he retires early. Each company has different rules regarding this situation. Some government jobs provide pensions as well.
Options for the Self-Employed
A Simplified Employer Pension (SEP) allows a self-employed person to set up an IRA but contribute up to 25% of his annual income. The self-employed may also set up a "solo 401(k)," which has similar tax benefits to an employer-sponsored 401(k) just without the matching. Another option is a Keough, which is more difficult to set up and manage, but allows you to set aside a large sum of money that could yield greater gains.
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