Retirement Plans

What Is A Retirement Plan And How Does It Benefit Me?

A retirement plan is a financial account designed to provide income security during your retirement years. These plans involve saving/investing money over a period of time and come in various forms. Having a retirement plan is essential for building a financially secure future and enjoying a comfortable retirement. Here are five key benefits of having a retirement plan:

1. Financial Security in Retirement: Perhaps the most obvious benefit is that a retirement plan provides financial security when you are no longer earning a regular income from a job. It allows you to better maintain your standard of living during retirement.

2. Tax Advantages: Contributions to traditional retirement accounts are often tax-deductible, which means lower taxable income in the year you make contributions. Additionally, investment earnings in retirement accounts are typically tax-deferred, meaning you won't pay taxes on them until you withdraw the money during retirement, potentially allowing your investments to grow more quickly.

3. Compound Growth: By consistently saving and investing for retirement over a long period of time, you can benefit from compound growth. Compound growth allows your investment returns to generate additional returns, potentially leading to significant growth in your retirement savings over time.

4. Retirement Income Diversification: Having a retirement plan allows you to diversify your sources of retirement income. Relying solely on Social Security or pension benefits may not be sufficient to maintain your desired lifestyle in retirement. Saving through retirement accounts can help supplement your fixed benefits.

5. Retirement Flexibility: With a retirement plan in place, you have more control and flexibility over when and how you retire. You can choose when to start withdrawing funds from your retirement accounts and how to allocate those funds to meet your specific retirement goals and lifestyle preferences.

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Common Plan Types

IRA

403(b)

A tax-advantaged plan that allows you significant tax breaks while you save for retirement. Contributions you make to a traditional IRA may be fully or partially deductible, depending on your filing status and income.

403(b)

A 403(b) is a retirement plan offered by public schools, certain charities, and churches. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts.

401(k)

403(b)

401(k)

An employer-sponsored retirement plan that can be traditional, Roth, SIMPLE, or safe harbor. While 401(k) plans are funded mainly by employee contributions, some companies will match employee contributions.

457(b)

SIMPLE IRA

401(k)

A 457(b) plan, or "457 plan", is a tax-advantaged retirement plan that allows employees of certain state and local governments, as well as non-governmental entities, to defer income taxation on retirement savings. The plan can be established by a state or local government or a tax-exempt organization.

SIMPLE IRA

A Savings Incentive Match Plan for Employees that allows employees and employers to contribute to traditional IRAs. SIMPLE IRAs are good for small employers that don't currently have a retirement plan.

SEP IRA

SIMPLE IRA

A Simplified Employee Pension plan that allows business owners to contribute to their employees' retirement and their own retirement savings. SEP IRAs are often described as a mix between an IRA and a 401(k) because they have a much higher contribution limit compared to a regular IRA.

Traditional vs. roth

Traditional Accounts

A traditional retirement savings plan gives you tax advantages during the accumulation phase. Contributions you make to a traditional IRA may be fully or partially deductible, depending on your filing status and income. If it's a traditional 403(b) or 401(k), contributions are made pre-tax. Amounts in your traditional IRA are generally not taxed until you take a distribution from your IRA.

Roth Accounts

A Roth retirement savings plan that allows you to contribute after-tax dollars, and your investments can grow tax-free. Your withdrawals can also be tax-free if you meet certain requirements. You must be at least 59 1⁄2 years old and have held the account for at least five years to qualify. There are also no required minimum distributions (RMDs) in retirement.

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