Another complication is determining which tax deferred
savings plans your family is eligible for. Before making a decision, you should
carefully examine all options to determine what kind of saver you are.
There are many types of tax deferred savings. The most
common is a 401k. The 401k employee retirement plan offers high maximum
contribution limits and the opportunity to save interest over time. Just be
sure to follow 401k withdrawal rules and understand that you'll have to pay
taxes on the lump sums you take out.
If you leave your place of employment before an appropriate
retirement age, you will need to pay taxes and a penalty at that time -- or
roll your money over into an IRA.
An Individual Retirement Account (or an IRA, for short),
allows you to set aside thousands of dollars for your retirement, albeit less
than a 401k. You will not have to pay taxes on the income until after age 59
1/2.
You can look into all different types of IRAs to see which
one you qualify for, including: a Spousal Retirement IRA, Deductible IRA or
Roth IRA. With both 401ks and Deductible IRAs, you only pay taxes when you
start withdrawing at retirement.
Most people are recommended to go with their
employer-sponsored retirement savings plan if the company agrees to match your
contributions.
Next, analysts recommend that you sink some money into your
Roth IRA account; while you still pay taxes on your contributions, like you
normally would, you can withdraw money at any time without penalties and your
withdrawals will be tax-free starting at age 59 1/2.
Tax deferred Target Maturity Funds, consisting of various
bonds, stocks and cash assets, are a good, low-maintenance place to invest your
money as well.
To understand the difference between taxed savings and tax
deferred savings, let's look at some concrete numbers. If your monthly
retirement savings contribution is $250, in 20 years you would have saved
$81,897 after taxes.
By investing in a tax deferred savings plan, you would have
saved $106,753, even after paying a lump sum tax! The interest you generate
should provide a significant cushion for your retirement.
You may be jumping for joy that Uncle Sam's cut you a break.
It certainly is a generous deal, but as with anything, there are potential
pitfalls. You may find that the administration, management, insurance and
annual records maintenance fees outweigh the tax deferred savings you would
have received -- especially if you're tempted to use your funds before you turn
60.
Many early retirees find themselves saddled with a 10%
penalty or stuck paying a hefty tax when they opt to take all their money out
as a lump sum at retirement.
If you worry about the safety of your money and take
advantage of every protection plan at your disposal, then you may feel uneasy
that the FDIC doesn't cover tax deferred annuities, leaving you to pay for
separate protection.
A financial representative will help determine if tax deferred savings can be a good fit for your lifestyle. If you do some financial retirement planning now, you can pave the way to your golden years with ease.
Article Source: DesireToRetire.com