Throughout your life, you've probably built up numerous pension plans, and you've likely given thought to numerous retirement tactics. The key now, if you have recently retired or you are about to retire, is to start putting those pillars together to form a complete structure of what you have and find out what you may need going forward.
The 401(k)
The 401(k) is the most typical type of retirement account that is established between an employer and an employee. This account is comprised of stocks, bonds, mutual funds, and other investments that are funded with contributions from both parties. The funds in the 401(k) are not subject to taxation until they are taken from the paycheck, which can be advantageous depending on the individual's financial circumstances.
You can withdraw your money from a 401(k) account at any time, but if you withdraw before you are age 59 ½, the withdrawal is subject to a 10% penalty tax in addition to your normal tax obligation at the time of withdrawal.[1]
The Traditional IRA
An Individual Retirement Account, or IRA, can be opened with any reputable financial institution. There are annual limits on how much you can deposit into your IRA, but you have the freedom to decide how much to contribute and when to make your payments. As with a 401(k), the contributions to a traditional IRA are tax-deferred, meaning that the taxes owed won't be collected until you make a withdrawal from the account.[2]
The Roth 401(k)
Contributions to a Roth 401(k) are made from the employee's payroll, just like a traditional 401(k). The major distinction between the two is that the Roth version is taxed at the time of deposit, yet no taxes are due when the funds are withdrawn during qualified retirement age.[3]
The Roth IRA
Much like a Traditional IRA, a Roth IRA is an individual account that can be opened through a financial provider. Both have yearly contribution limits and the same flexible options. However, the main distinction between the two is that contributions to a Roth IRA are taxed upon entering the account but not upon withdrawal.
The Pension
When an employer provides a pension to an employee, they commit to supplying them with a regular monthly income after they retire. The sum that the individual will get is calculated based on numerous factors, primarily their last average salary and the period of time they were employed at the organization.[4]
Conclusion
As you can tell, taxes are a major part of retirement planning, and often making the right choice for your retirement involves being savvy about which tax-advantaged retirement savings vehicles to use. If you're looking for advice on how to manage your accounts and which accounts might be right for you, contact us for a complimentary review of your finances.