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January 2006 |
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Start a Retirement Plan 
In addition to confetti and champagne, the New Year brings with it a byproduct not all of us think about — we are all another year closer to retirement age. If 2006 is the year you start saving for retirement, or if you've already started, below is some useful information on the various qualified plans — accounts the government recognizes as retirement savings and has granted specific and extremely valuable tax breaks … as long as you follow the government's rules such as not touching the money until you are 59-1/2.For those whose debt has become manageable and they've got a reasonable emergency fund, the next critical step toward financial security is likely to be saving for retirement. For as little as $50 a month, a retirement plan can be started — and starting is the most important part. It's also easy. All it takes is talking to your employer's retirement plan administrator or contacting a financial institution and filling out a form. Picking the right plan When deciding on a retirement plan, the first question is whether your employer provides a 401(k) plan. If you expect to stay at your job for more than a year and your 401(k) plan includes an employer match, most financial planners will tell you this is your plan. The reasoning is that the employer match is free money, and few of us can afford to pass up free money. A certain percentage of your salary chosen by you will be diverted from your paycheck, before taxes, into your 401(k) account. Your employer's match will go there as well and the savings can add up fast. Most 401(k) plans offer a range of investment choices, about which your plan administrator can give you some advice. Once the money is in the account, it can grow by earning dividends, capital gains or interest — depending on your investment type — tax deferred. Tax deferred means the government won't tax the earnings on your account until you withdraw it for retirement. This enables your account to maximize the power of compound interest. Tax deferred also means you won't pay taxes on your contributions until retirement either. For example, if you make $50,000 a year, and you put $5,000 in your 401(k) you will only pay taxes on $45,000. In a sense, the government is paying you to save your own money. But wait, it gets better For those who don't have an employer-sponsored plan, an IRA (Individual Retirement Account) or Roth IRA is likely the next best choice. A traditional IRA is very much like a 401(k) but without the employer match. You can put up to $4,000 in an IRA and then deduct that contribution from your taxes, so if your income is $30,000 and you put $2,000 in an IRA, you will only be taxed on $28,000. The Roth IRA
The others While the 401(k), Roth IRA and traditional IRA are the big three when it comes to qualified plans, there are others. The SEP IRA — SEP stands for Simplified Employer Pension Plan — is geared for the self-employed or if you work at a very small company that doesn't provide a 401(k) plan. One of the big advantages of the SEP-IRA is you can shelter a lot of money from taxes — up to 25% of your income! Other accounts similar to the SEP-IRA, and offered by small businesses are Keogh Accounts and the SIMPLE-IRA. If your employer offers any of these options you can expect tax-deferment on your contributions and earnings. Whichever plan you have available to you, the important thing is to get started. |
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