What Are Retirement Plans?Retirement plans are arrangements to provide people with an income after retirement. The most common private retirement plans are IRAs and 401(k) plans. Also, some large businesses provide pensions to their employees and pay them a monthly amount depending on the length of employment. What are IRAs?Individual Retirement Accounts (IRA) can be either employer provided or self-provided, and give certain tax benefits. Contributions are made to the account and the IRA owner can invest this money in most types of securities. The money is held by a custodian, usually a bank or brokerage firm, and the custodian does the actual investing based on directions from the IRA owner. Transactions inside the account, such as interest and capital gains, are not taxed.
There are two main types of IRAs: - Traditional IRA - Contributions are tax-deductible. However when the money is withdrawn it is taxed as income. This tax break provides an immediate advantage, however at retirement it is only beneficial if the holder is in a smaller tax bracket. Withdrawls cannot begin until age 59½ or a 10% fee is charged, and once withdrawls begin there is a minimum annual withdrawl.
- Roth IRA - Contributions are made after being taxed but withdrawls are made free from income tax, including most earnings from the account. There are also fewer restrictions and requirements on withdrawls.
What Is a 401(k)?
A 401(k) plan is an employer sponsored retirement plan. A part of the employee's wages are deferred into the account and the employee selects from a number of investment options. Some companies also match employee contributions to some extent and pay extra money into the account. The contributions are not taxed, and gains from investments in the 401(k) account are not taxable events, so no capital gains tax or interest tax is applied. When money is withdrawn it is taxed as income, however. Like IRAs, money withdrawn before age 59½ is subject to a 10% fee.
Both 401(k) plans and IRAs have specific eligibility requirements and contribution limits. Also, most plans allow for early withdrawl without a penalty in certain situations that constitute hardship. Do I Need a Lawyer?The different retirement plans can be complex and difficult to understand. An experienced tax attorney can help you understand the tax implications of each plan and help you determine which plan is best for you. |
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