Understand Your Retirement-Plan Choices

Many different kinds of retirement plans are available

Choosing a retirement plan doesn't have to be a game of chance

Many people are unaware of the different types of retirement plans available to them. While most are familiar with the basic plans offered through their employer, few know much about additional plans they may still be able to invest in. Self-employed people in particular find themselves wondering how they can plan for retirement and what plans are available to them.

Qualified vs. non-qualified retirement plans

Plans are generally classified as qualified retirement plans or non-qualified ones. Qualified retirement plans are those most commonly used by large companies. These offer tax incentives to employers for contributing to the retirement plans of their employees. Besides the fact that employers generally match an employee’s contributions, qualified retirement plans are of benefit in that employee contributions are made on pretax income directly from one’s paycheck. This means that money that would otherwise go to the government is invested in one’s future instead. Also, taxes do not have to be paid on such contributions until money is actually withdrawn from the plan when a person retires or decides to withdraw the money for other purposes.

Here is a list of the most popular qualified retirement plans:

  • 401(k)
  • Roth (401)
  • Defined-benefit plan
  • Stock bonus plan
  • Defined-contribution plan
  • Money-purchase pension plan
  • Profit-sharing plan
  • Keogh plan (for self-employed individuals)

A non-qualified retirement plan, on the other hand is often used to reward high-ranking employees who earn a substantial income. Employees who invest in non-qualified retirement plans can still enjoy tax-deferred investing, but, unlike with qualified plans, they may lose the ability to transfer their money to another type of retirement account when they leave their job. This means that they may have to withdraw all of their money upon leaving their job and pay taxes on it at the same time.

Here is a list of the most popular non-qualified retirement plans:

  • 457 plan (also known as a Tax-Sheltered Account or TSA )
  • 403(b) plan
  • Roth IRA
  • Traditional IRA
  • Rollover IRA
  • Converted Roth IRA

Along with the previously mentioned Keogh plan, self-employed entrepreneurs also have the following retirement plan options:

  • SEP IRA
  • Simple IRA

Each of these plans is unique and offers its own benefits, as well as drawbacks. Before selecting the one that is right for you, read up on what each offers and consider sitting down with a professional who can explain the ones that you’re most curious about. Wealth education involves good research, asking a lot of questions and discovering the investment options that are best suited for your budget. By having a general understanding of the retirement plans that are available to you, you can now begin a further exploration in finding the one that is perfect for you.

Prepare for a great future today

While many people spend a lifetime working for money, smart investors know how to make their money work for them. Investing in a good retirement plan is one approach to doing so and understanding how each one works is the beginning of wealth education. It is never too early to begin retirement planning and those who do not have a plan are strongly urged to start one now. If you’ve been relying on cash advances or a loan till payday to pay your monthly obligations or for emergencies, try to imagine how you’ll be able to manage as a senior citizen who is without a payday at all. Start preparing for you future today by defining a personal budget that includes contributing to a good retirement plan.

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