Planning Retirement with Tax Deferred Savings
By: Mike Selvon
 
As you approach your golden years, you may be wondering about the various pros and cons of tax deferred savings plans. While the idea of not paying taxes on your savings may seem alluring, there are also fees to consider.
 
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.