You must have heard about investment gurus preaching about investing in retirement plans.
So, why is it advised to start investing in retirement plans, especially from the very beginning of our professional careers?
As we have seen in history, as years pass currency losses its value due to a variety of factors such as inflation and other geo-political reasons. Thus, without adequate savings aside, it will become difficult for us to maintain our expenses, especially in our older ages.
This is where retirement saving plans come into the picture. There are many retirement-focused savings plans, wherein you can invest your pre-tax or post-savings, and comes with tax benefits, thus allowing you to save more on your investment.
Moreover, due to the compounding effect, your investment principal will most likely yield better returns in the long run.
To help you plan your retirement savings journey, in this article we will be taking a look at some of the best retirement savings options for people in the United States.
Let’s Look At the Options –
Individual Retirement Account (IRA)
IRA or Individual Retirement Account is a type of individual savings account, wherein the account holder can contribute pre-tax or post-tax savings. IRAs usually invest the money in stocks, bonds, etc., thus giving the investor the ability to grow their investment returns in the long run.
Traditional IRA, Roth IRA, and SEP IRA are the common types of IRAs offered by providers.
Investments made in traditional IRAs are tax deductible. Moreover, the returns aren’t taxable until withdrawn.
Post-tax savings are invested in Roth IRAs, thus there are no tax benefits with the investment itself. However, under certain conditions, the withdrawal from Roth IRAs is completely tax-free, making it more attractive for long-term retirement investment.
A Simplified Employee Pension Individual Retirement Account, or SEP IRA, is another type of IRA that is focused on self-employed individuals and small business owners. SEP IRAs offer tax benefits similar to traditional IRAs. A key highlight of SEP IRA is that it allows employers to contribute on behalf of their employees, in turn attracting employees to remain with the employer.
Instead of investing in regular IRA plans that in turn put your money in assets like stocks, bonds, mutual funds, etc., investors are nowadays more interested in gold-based IRAs.
So, gold IRA plans can either be based on a traditional IRA or Roth IRA. The key difference here is that your investment is made in precious metals such as gold, silver, etc., instead of mutual funds, stocks, etc. However, you will require a gold IRA custodian like Lear Capital to buy, store, and sell the precious metals in your gold IRA account.
401(k) and 402(b) Plans
401(k) and 403(b) are another popular schemes for retirement-focussed investments.
Both 401(k) and 403(b) are similar retirement saving schemes offered by employers. The major difference is that 401(k) plans are offered by businesses that operate for-profit whereas 403(b) plans are offered by tax-exempt organizations such as govt. Organizations, schools, charity organizations, hospitals, etc.
In both schemes, employees can contribute their savings and employers have the option to match employee contributions. The exact contribution made by the employer will depend on the business/organization.
Pension plans are another retirement savings scheme wherein employers contribute a set amount of money to the account of each individual employee. The employee can withdraw the amount post-retirement.
Defined Benefit Plans and Defined Contribution Plans are the two common types of pension plans.
In a Defined Benefit Plan, the employer decides the pension amount that the employee receives after retirement. The amount is calculated based on the salary the employee receives and the number of service years in the company.
In a Defined Contribution Plan, the employer deposits a fixed monthly amount to the pension account of the employee. The deposited amount is then used for investments such as stocks, mutual funds, bonds, etc. Thus, post-retirement the employee can withdraw the amount contributed by the employer and any profits made on the investments made.
Just like any other form of investment, the key to success in retirement savings is to diversify your investment into different available schemes. Even though the 3 retirement saving plans mentioned in this article are the commonly opted ones, you may get other options as well depending on your income bracket and other factors.