I’m ready to invest in my future, but I need some help getting started. How do I choose the retirement plan that’s are right for me?
Here’s what you need to know about the most common retirement plans and how to choose the path that best suits your needs:
Save For Retirement
If you are employed, you may already have a retirement plan through your workplace. But you may also want to consider other options outside of work. Here are some of the most common plans:
401(k), 403(b), 457(b), and Thrift Savings Plans are some of the employer- sponsored retirement plans. These allows eligible employees to save and invest for their own retirement on a tax-deferred basis. Employees can decide how much money they want deducted from their paycheck and regularly deposited into their accounts, as long as contributions fall within IRS limits. Sometimes, an employer will offer to match contributions, which is essentially free money for your retirement savings.
Pros: Contributions are tax deferred (meaning you don’t pay federal income tax on the contributions or earnings until you withdraw them in the future) and there is generally no minimum for contributions.
Cons: Fewer investment options than other retirement accounts; may have high account fees and early withdrawal penalties.
Best choice for: All employees with a W-2, especially employees who have an employer offering to match contributions.
Best age to invest: As soon as you start working at your first job.
Traditional IRAs are retirement accounts that offer eligible individuals with earned income an upfront tax break.
Pros: Contributions and investment earnings aren’t taxed until withdrawn. Contributions may be tax-deductible and significantly lower your taxable income.
Cons: Withdrawals during retirement are taxed at your tax rate during that time. You typically need to leave funds in your account until at least 59 ½ to avoid tax penalties. At age 70 ½ to 72 (depending on your birthday) you must begin taking distributions even if you are still employed (and therefore, possibly in a high tax bracket).
Best choice for: Individuals who are currently in a higher tax bracket than what they anticipate being in during retirement and employees who don’t have access to a workplace-sponsored retirement plan.
Best age to invest: Age 18, or the minimum age allowed in your state.
Roth IRAs are retirement plans that do not allow for tax-deductible contributions, but feature tax-free withdrawals during retirement.
Pros: Withdrawals are tax-free. There is no age limit for making contributions, but you must have earned income.
Cons: Contributions are not tax-deductible. There are also income limits for eligible contributors.
Best choice for: Individuals who anticipate being in a higher tax bracket during retirement and individuals who may need to access some of their savings before they retire.
Best age to invest: Age 18, or the minimum age allowed in your state.
Annuities
An annuity is a contract between you the contract holder (sometimes called the annuitant) and an insurance company. The contract stipulates that the insurer promises to pay the annuitant a predetermined amount of money on a periodic basis for a specified period, in exchange for regular contributions.
Many people purchase annuities to serve as retirement-income insurance, which often guarantees them a regular income stream in retirement, often for the rest of their life.
There are two primary categories of annuities:
Immediate annuities requires that you to give the insurance company a lump sum immediately and then begin receiving payments right away. Depending on the type of the annuity, the payment amount may be fixed or variable.
Deferred annuities allow you to make contributions throughout your working life which can be converted into an income stream when you reach retirement. They can also be purchased with a lump sum. Being employed is not usually required.
Within these broad categories, there are several types of annuities from which to choose:
- A fixed annuity usually guarantees a minimum interest rate.
- Indexed annuities blend the features of fixed annuities with the potential for additional growth, depending on how the stock markets perform. You may be guaranteed a minimum return along with a return that is directly linked to any rise in the relevant market index.
- Variable annuities provide a return based on the performance of a portfolio of mutual fund like investments that you select. The insurance company may also guarantee a minimum income stream if stipulated in the contract.
While each specific annuity will have its own pros and cons, all annuities share commonalities:
Pros: Generally, during the accumulation phase of an annuity contract, earnings grow tax-deferred. Withdrawals are taxed at the same tax rate as your regular income. Contributions to annuities funded through an IRA may be tax-deductible.
Cons: Some annuities may have high fees. Also, there is generally a minimum age for allowable withdrawals without penalty.
Best choice for: Immediate annuities can be a good choice for individuals who are close to retirement and have significant retirement savings or a onetime wind fall they’d like to invest. An annuity’s can be a beneficial addition to your retirement plan, especially if you are concerned that you will outlive your retirement savings.
Best age to invest: In general, the best age range for purchasing annuities is between 40 and 70.
Are you ready to start investing for your future retirement? Stop in to any Patriot branch today to get started or Click Here for more information.
*Employer Based Retirement Plans and Annuities are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal.