Retirement Savings Options

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Individual Retirement Arrangements (IRAs) are sometimes called "traditional IRAs." IRAs were established by Congress to encourage people to save for retirement by providing tax advantages. Qualifying individuals may contribute up to $5,000 annually to an IRA. If you’re aged 50 or over, you may make catch-up contributions of $1,000 beginning in 2006. Tax benefits vary depending on your income and whether you contribute to other tax-advantaged savings plans (e.g., a 401(k) plan). In addition to a possible tax deduction of IRA contributions, earnings in an IRA grow tax deferred until withdrawals begin. Your money must be designated as an IRA, in an approved account. You have a wide choice of investment options, including stocks, bonds, mutual funds, CDs. Funds in an IRA are considered long-term savings and, as with 401(k) plans, you may be subject to a 10 percent IRS penalty as well as to tax liability for premature withdrawals—generally before the age of 59 1⁄2. Consult a qualified financial or tax professional for more complete information.

Roth IRA. Contributions to a Roth IRA are made with after-tax dollars, but investments grow tax-free. Qualifying individuals may contribute up to $5,000 annually to an IRA. If you’re aged 50 or over, you may make catch-up contributions of $1,000. Roth IRAs have income limits. That is, you may not make contributions if your adjusted gross income is more than $110,000 (filing singly) or $160,000 (filing jointly). Investment options are the same as those in a traditional IRA. Unlike traditional IRAs, though, all contributions to a Roth IRA are made with after tax monies. However, if you meet the distribution requirements of the plan, withdrawals of both contributions and earnings are tax-free. If you don’t need the tax deduction you can get on a traditional IRA, a Roth IRA is probably a good choice if you qualify. Like traditional IRAs, early withdrawals may be taxed or may incur tax penalties. Consult a qualified financial or tax professional for more complete information.

401(k) Plans. If your employer offers a 401(k) plan, it may be one of the best retirement savings vehicles available to you. A 401(k) is a retirement savings plan to which you can contribute a certain percentage of your gross income, thereby reducing your current income for tax purposes. In addition, your employer may contribute matching funds to your 401(k) plan. Typically, 401(k) plans offer numerous investment choices, but you will need to choose from those your employer offers.

Earnings in a 401(k) grow tax-deferred. Income tax is due when the money is withdrawn, usually after retirement. If you with-draw money before you turn 59 1⁄2, however, you may also be subject to a 10 percent IRS penalty. While early withdrawals are generally not permitted, some 401(k) plans may permit withdrawals for "hardship" reasons, such as medical emergencies or college tuition. You do pay income tax on the amount withdrawn, and a 20 percent mandatory withholding generally is required from the distribution.

403(b) Plans are sometimes called TSAs or tax sheltered annuities, because tax sheltered annuities were, at one time, the only investment option for these plans. 403(b) plans are retirement plans for non-profit organizations that are very similar to 401(k) plans, and have investment options similar to 401(k) plans.

Keogh Plans are retirement plans for people who are self-employed. Usually, a maximum of 25 percent of net income (to a maximum of $46,000 as of 2008) can be contributed to these plans on a tax-deferred basis. Keoghs are more complicated than IRAs, 401(k)s, or 403(b)s, so it’s wise to get advice from a tax professional before setting up a Keogh Plan.

Annuities. Annuities are financial contracts issued by an insurance company. An annuity may be deferred or immediate. With a deferred annuity, you put money in, and over time it accrues income and earnings. The payout occurs at some later date when you may receive a steady stream of payments to supplement your income.

Immediate annuities are purchased with one lump sum payment and payouts usually begin immediately. You receive payments on a regular basis (e.g., monthly), giving you with a steady stream of income. Generally, you can choose to have the payouts guaranteed by the issuer for as long as you live, or choose from a number of other payment options.

Because insurance companies generally administer annuities, they can be set up to include life insurance benefits, such as a death benefit to a surviving spouse, which may or may not have an additional fee. Bear in mind that annuities can be a complicated investment. Before purchasing, discuss specifics with a qualified financial professional to make sure you understand all the options and make the best decisions to meet your financial needs.