There are many different retirement accounts that exist which can make picking one quite confusing. So how do you decide which account is best for you? Here are some of the strength and weaknesses of each individual retirement account. Depending on your personal situation will help you determine which account is right for you and your family. Make sure that you take a close look at the different tax breaks that you can receive with each account.
In many cases the tax benefits can be quite dramatic and have a big affect on your bottom line. Also they close attention to the fees that you may incur while owning one of these retirement accounts. Unwanted fees can become very costly.
Simple IRAs and Roth IRAs
A traditional IRA helps you put money away every year up to a certain sum. In most cases if you are younger than 50 years old you can contribute up to $5000 a year tax-free. You can make additional contributions into these retirement accounts but you will have to pay tax on anything more than $5000. If you are over the age of 50 then you can make contributions up to $6000 per year. With traditional IRAs you do not pay tax on the money that you invest but you do pay tax when it is time to sell.
Roth IRAs work much the same way as simple IRAs. The major difference is that you pay tax on the money that you contribute but you do not pay tax when you take it out. Roth IRAs are also very beneficial if you need to tap the money that you’ve contributed at any time. As long as you only touched the money that you have contributed and not any of the interest that has been accrued then you do not have to pay tax on that money.
With Roth IRAs you are trading a tax deduction today for free income tomorrow. Roth IRAs are some of the most popular retirement accounts that exist. They also create great tax shelters for small businesses. Many small businesses can make contributions into these accounts that are much greater than $6000 per year.
A company 401(k) plan can be a very advantageous form of retirement account. In many instances companies will match your contributions up to a certain percentage. These accounts are very useful to help you maximize your contributions into your retirement plan. 401(k) plans can be transferred if you lose your job or get a new one. 401(k) money is taken out before you see your paycheck. These contributions are made directly into your retirement account.
You have total control of how you invest your money in a 401(k) plan. You can make much larger contributions into these plans then you can with the simple IRA. This can be very beneficial for those who are starting late to save money. 401(k) plans offer the most flexibility when trying to set your retirement age. You can stop working early and start drawing money from these accounts as early as 55 years old. These are some of the best retirement accounts for those who work for outstanding companies that have great matching policies.
Planning for retirement can be quite complicated if you do not know which accounts are right for you. As you can see there are many different retirement accounts that have different advantages and drawbacks. Make sure that you take the time to find out which retirement plan is right for you.