Often times, working with retirement investments can be confusing for each individuals particular circumstance, especially when they are thinking about their retirement plans. For most circumstances, individuals simply invest in whatever accounts are offered to them by their employers. The right retirement accounts will depend on a host of factors including your age, retirement goals, and capability to invest. Individuals need to know about all these areas.
One such retirement account is a Roth IRA. IRA stands for Individual Retirement Accounts and there are two types, a traditional IRA and a Roth IRA. For the purposes of this article, Roth IRAs will only be discussed and what it is essentially is an individual retirement vehicle where people make after-tax contributions up to $5000 per year for individuals under the age of 50 and for persons over age of 50 you can contribute up to $6000. There are many pros to investing in a Roth IRA and they include that the qualified distributions are tax fee, investors have a broad array of securities they can invest in, just about anyone can qualify for a Roth IRA (the only requirement is that the contributions are earned income and your yearly income does not exceed a certain amount). There are some disadvantages to a Roth account and they are the annual contribution cap, while substantial for some, can be an minimal amount for others. Also, if you have exceeded the contribution limit and do not withdraw the money in time, you could be subject to a 6% tax penalty on the excess. Also, the contributions are not tax-deductible.
Another retirement accounts that many people have heard of but may not know what it is exactly is a 401K. This type of Retirement Accounts is a company/employer sponsored retirement accounts where a percentage of the worker’s pre-tax pay is taken out and is invested, by a third party administrator, into a variety of investment vehicles like, mutual funds, savings accounts, and bonds. Annually you can invest up to $16,500 if you under 50, $21,500 if you are over 50. The good thing about this retirement accounts is that you get to pick where and how you want your money invested. Additionally, most companies will match part of your contribution which in a sense is free money you are getting. These are all advantages of a 401k Retirement Accounts: free money, pre-tax dollars being invested, and the high contribution limits. The cons are if you take an early distribution you will be subject to hefty taxes and penalties, second, you are beholden to the investment choices you make and if you are not market savvy there is no advisor assisting you with your choices. Even though most of the securities are low risk, there is still an inherent risk with investing.
Social Security is a federal program that citizens pay into while they are of working age and when they retire (retirement age is currently 67) and meet certain requirements they can collect monthly social security benefits. It is a kind of retirement accounts that was intended to subsidize some of the costs of retirement.
Pensions are another retirement accounts established by an employer and generally run by some 3rd party financial group. This type of retirement account works by the employees and employers pooling a percentage of their earnings into a defined investment vehicle and upon retirement the company will help finance the employee’s retirement.
In conclusion, there are several different retirement accounts a person can choose from; whether it be a after-tax Roth IRA account, a company sponsored pension or 401K, or the Social Security that you pay into in the form of taxes. As with investments, it is sometimes best to be diversified. Taking into consideration inflation, and if you are able try to contribute the max to more than one retirement account.