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The Different Types of Retirement Plans
Government, employer, and individually sponsored retirement plans are all excellent ways to save up for your retirement. Relying on Social Security is just plain silly. The odds aren't good that this program will be providing the same income level in the next decade. Lets take a look at the major plans we can use to save for retirement ourselves.
401k
Your 401k is a voluntary retirement plan offered to employees of a company that allows up to a certain percentage of their pretax pay to be set aside and invested within the retirement plan. The funds and the growth are not taxed until the funds are withdrawn. The percentage of pretax pay varies from company to company and can increase with each year of employment. The employer can also contribute funds to the employees' plan if they wish. If your employer does match your contributions, then by all means invest as much as you can. This is essentially free money! Keep in mind that there are restrictions as to when and how you can withdraw your 401k funds without penalties. It is also your responsibility to manage the fund.
IRA
A retirement investing tool for employed individuals that allows an annual contribution of 100% of earned income up to a specified maximum amount. The contribution may be deductible from income taxes, depending on your income and coverage by an employer-sponsored retirement plan (if any). Eventual withdrawal is taxed as income, including the capital gains. Since your income is less after you retire, you will be taxed at a lower rate. There are over 10 different varieties of IRAs, each offering different tax and income benefits.
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