In order to ensure that we have enough capital to fund our retirements, its important to understand what types of retirement plans are available. Many retirement plans have some sort of connection to Federal law. In most cases this is due to how they are treated for tax purposes.
As with anything that is involved with law, the rules and characteristics of these retirement plans can seem complicated and tricky. However once you get past the industry jargon, the benefits of these plans are easy to understand.
Government Sponsored Retirement Plans
Social Security - Without a doubt, Social Security, is the most popular and common retirement plan. This is due to the fact that, without a choice, most of us pay into Social Security through paycheck deductions. In light of this, we are all invested in the “health” of the Social Security Program.
Corporate Retirement Plans
401(k) - Investment contribution plans, such as 401(k)s, have increased in popularity over the past few decades. This is mainly due to employer’s shift from offering defined benefit pension plans to tax advantaged contribution retirement plans. This plan offers a tax-deferred contribution to an investment account by the employee and an optional employer matching contribution as well.
Profit Sharing Plan - Like the 401(k), Profit Sharing Plans is an defined contribution plan and allows an employer to make tax deferred contributions to an employee’s retirement fund. One common misconception is that the company has to make a profit in order to contribute, which is not accurate. However there is a contribution limit of 25% of total eligible employee compensation for the year.
Defined Benefit Plans - In addition to contributing to an employee’s retirement account, employers can decide to provide a defined benefit retirement plan. With this type of plan, an employee is guaranteed a specific benefit after retirement. The benefit can be calculated by a specific dollar amount or a percentage of compensation.
Individual Retirement Plans
Individual Retirement Accounts - There are many advantages to contributing to an IRA. The main benefit concerns tax treatment, which varies between traditional and Roth IRAs. There are limits to the ability to benefit from the use of IRAs. These limits include participation in other tax-qualified retirement plans and compensation thresholds.
Keogh Plan - Keogh Plans are a little less popular than the other retirement options. This is due to the fact that Keogh Plans were created to provide tax-deferred retirement benefits to the self-employed and sole proprietorships. Keogh plans can be structured a few different ways to include a money purchase arrangement, profit sharing and defined benefit.
When it comes to retirement plans, there are plenty of different options to choose from. Most of these plans have similar benefits, as many of them boast tax advantages. Regardless what plans are available to you, the key is getting started early and maxing out your contributions.