|Lesson 6: Retirement Investment Vehicles|
If you ask yourself why it’s important to invest, one of the answers
may well be a comfortable retirement. To ensure your retirement
matches or comes close to the way you want to live, you’re likely to
need a source of income in addition to Social Security and whatever
pension a former employer might provide. Fortunately, Congress has
created a variety of specialized retirement savings plans to give
your efforts an added boost.
These plans are designed specifically to help you set aside money
for your retirement—for basic living expenses and to pay for the
things you want to do when you have the time to do them, such as
traveling, learning new skills, and leaving a legacy to your loved
ones or the institutions that are important to you.
The chief benefit of these retirement plans is the substantial tax
advantages they offer—specifically the potential for tax-deferred or
tax-free growth. Tax-deferred means you postpone taxes until you
withdraw money later on. Tax-free means you owe no tax on your
investment earnings at all, provided you follow the rules for
withdrawing. For example, if you’re using a tax-free plan to save
for your retirement, you must begin withdrawing at least a certain
amount of your savings by the time you reach age 701/2.
In exchange for these tax benefits, there are certain restrictions.
For instance, the amount you can contribute to these retirement
plans each year is capped, though the limits have regularly
increased to encourage savings and keep pace with living costs. In
addition, you generally must reach a certain age before you can
withdraw your money without penalty. And many of the plans require
withdrawals once you reach a specific age—whether or not you
actually need the money at the time.
Although the various plans have the same ultimate objective—helping you save money for your retirement—they are structured differently. With some plans, you must take the initiative to enroll. The best example is an individual retirement arrangement (IRA). On the other hand, your employer may offer a retirement savings plan that simply requires you to agree to participate. In fact, some employers enroll you automatically, making it easy for you to share in the benefits unless you decide to opt out.
If you work for a small company or you’re self-employed, there’s
another set of retirement plans that makes it possible for you to
invest for the future. These plans share certain characteristics of
individual plans, such as a choice of investments, and some share
certain features of larger employer-sponsored plans, such as
Regardless of the plan you’re part of—and there may be more than one—participating in retirement savings plans may increasingly make the difference between a retirement that’s secure and one that is not.
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