What's the Best Way to Save for Retirement?
While most American workers will earn social security benefits upon retirement, the monthly payout often isn't enough to let them comfortably enjoy the rest of their life.
Rather than rely solely on social security, many take advantage of several other types of retirement accounts. The two most popular options are Individual Retirement Arrangement (IRA) and 401(k) plans.
An IRA is a retirement plan that offers several tax advantages. The most popular types of IRAs are:
Traditional IRA: The top advantage is the tax deferrals that allowed. According to the Internal Revenue Service, money that is contributed to the IRA annually is taken from yearly income, reducing the saver's tax liability for the year. Income tax is not applied until funds are withdrawn from the account.
Roth IRA: This plan does not offer a tax deferral option. By paying the tax upfront, it eliminates the need to pay tax on any earnings acquired over the life of the investment, according to the IRS.
Under both plans, there is a 10 percent penalty for withdrawing money before the age of 60, though there are exceptions for things such as a buying a home, paying for higher education or covering medical bills.
Another retirement saving option is an employer-sponsored 401(k) plans. These programs allow employees to set aside a portion of their income in a separate retirement account until it is distributed later. In some plans, the employer also makes contributions, often matching the employee’s contributions up to a certain percentage, according to the IRS.
There is a 10 percent penalty for taking money out of the account early, and there are fewer exceptions than under the IRA plans.
Several other types of retirement saving options include 403(b) plans, which are similar to a 401(k) but offered by public schools and certain tax-exempt organizations, and Simplified Employee Pension and Salary Reduction Simplified Employee Pension plans.
Chad Brooks is a Chicago-based freelance business and technology writer who has worked in public relations and spent 10 years as a newspaper reporter. You can reach him at email@example.com or follow him on Twitter @cbrooks76.
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