When considering how to choose a retirement plan, it is best to begin with an overview of the available options. Keep in mind that retirement could last as long as 30 years.
Lower inflation than past decades will make it easier to maintain a standard of living on a fixed income, according to Bankrate
. However, $1 million in retirement with a 4 percent annual withdrawal will only go about 25 years. Many people can expect fairly low returns on their investments, and savings rates have been going down for years. In the 1940s Americans saved more than 25 percent of their disposable income. Today that number is less than 5 percent.
The IRS offers many different types
of tax advantages for retirement plans. The choice depends on your current goals and future plans. There are more than a dozen different types of tax-sheltered retirement plans.
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The most widely understood are Individual Retirement Arrangements (IRAs), which allow Americans to contribute small amounts – up to $5,500 a year – to their retirement funds at a reduction of their taxable income. That money can grow tax-free until retirement. When the money comes out of a traditional IRA it will be taxed.
A Roth IRA is different in that the money goes into the account after taxes, but will not be taxed at retirement. The limits for contributions are the same for most people. Higher income brackets will not be allowed to contribute as much to a Roth IRA.
The 401(k) plan is a “salary deferral” plan. It also allows the employee to reduce their tax burden. Employers contribute money to these accounts. The money is taxable at retirement unless it is a Roth 401(k).
A variety of tax-sheltered plans are available to public employees and employees of tax-exempt organizations. The 403(b) plans allow not-for-profit organizations and churches to offer plans similar to 401(k) plans.
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Investopedia recommended that employees consider what their employers offers and whether the company offers matching funds in certain accounts. This is essentially extra income that should not be passed up.
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