Anyone who has plans to retire knows that it isn’t as simple as putting a few dollars aside each paycheck. Retirement hinges on workers developing a plan that takes into account current and estimated future income as well as retirement goals.
Those who are currently employed need to not only implement a savings program, but to also begin to set up specific financial targets that will help them reach their financial goals. Once they are closer to retirement and those financial goals are more or less set, the workers must consider lifestyle aspects.
There are a wide variety of retirement plans, each with their own benefits and drawbacks:
- Qualified plan: These are set by the employer, who establishes plans to provide retirement benefits to their employees. Qualified plans include 401(k) plans and are generally tax deductible.
- Traditional IRA: An Individual Retirement Account is established by each taxpayer, who can contribute 100 percent of his or her compensation until a maximum dollar amount is reached. IRAs are taxed as income upon withdrawal.
- Roth IRA: Workers deposit money into Roth IRA accounts with after-tax dollars and its distributions are generally tax free. These accounts are often used as a supplement to a main retirement account and contributions to them are discretionary.
- SEP IRA: A Simplified Employee Pension is a plan established by employers, who can make tax-deductible contributions on the behalf of the employee. While the employee will not pay any taxes on these contributions, the distribution and earnings are taxable.
- SIMPLE IRA: A Savings Incentive Match Plan for Employees retirement plan allows employers to contribute part of their pretax compensation to the plan, which means the taxes are deferred until distribution. It is also known as an elective-deferral or salary-reduction contribution.