The Most Common Retirement Plan Options
There are many options when it comes to retirement savings. There are IRAs, Target-date mutual funds, 403(b), and 401(k) plans. Each has its advantages and disadvantages. Here are some things to keep in mind to make the decision easier.
Target-Date Mutual Funds
If you have a defined contribution plan, you may want to consider investing in target-date mutual funds. They can be a good way to invest your money in retirement. You can usually find information about the performance of these funds on the plan’s website or the recordkeeper’s website. In addition, each plan has a fiduciary who manages investments. This person chooses and monitors the target-date funds in your plan. Only after this fiduciary has vetted each one can you invest in them.
A target-date fund uses a glide path to reallocate money over a set period. This means it will adjust its allocation among asset classes to match your age, risk tolerance, and investment goals. This allows you to invest more aggressively at the beginning of your fund’s life but will gradually transition to less-risky investments as you age.
401(k) Plans
One of the most common retirement plan options is the 401(k) plan. These plans allow employees to choose how their contributions are invested. Many offer built-in diversification and professional management and can meet various investment goals. However, 401(k) investments do involve some risk. Sometimes, the investments may be worth less than the original investment amount.
Employees’ participation in 401(k) plans varies significantly by income and job tenure. Low-income workers are less likely to invest in pension plans due to their liquidity constraints. Furthermore, low-income workers are often subject to lower tax rates, which means they receive less benefit from tax-deferred investments. This also means they have less need for additional retirement income.
IRAs
An IRA is a retirement plan that a person can open to save for retirement. These plans are easier to administer and require less government regulation than their traditional counterparts. Small business owners and self-employed individuals also use these plans. In addition, self-employed people and small businesses can set up a SEP IRA, which is also easier to operate than a traditional 401(k).
An IRA offers a range of investment options and can be structured to provide tax benefits. However, your total contribution to all IRAs cannot exceed $6,000 a year or $7,000 if you are over 50. A SEP IRA is a separate account that is available for self-employed people. An IRA also has rules regarding required minimum distributions (RMDs), which must be taken according to your life expectancy and account size. You’ll lose 50% of your money if you fail to meet these deadlines.
403(b) Plans
A 403(b) plan is a retirement account that a person can contribute to as a part of their employment. It is available to all employees working 20 hours or more weekly. There is a minimum age when a person can start making withdrawals from a 403(b) plan without penalty. Depending on your contract, the minimum age may differ from the IRS requirements. Before you start making withdrawals from a 403 (b) plan, you must first calculate your minimum distribution amount. This is based on the IRS Uniform Lifetime Table. You may also need to use a worksheet to help you figure out this amount.
A 403(b) plan is similar to a 401(k) plan but has a few differences. Most 403(b) plans offer low-cost index funds that experts recommend. When choosing investments, it is important to remember your age and willingness to take the risk. Generally, younger people should invest more in stock funds, while older people should invest more in bond funds. You can also choose a target-date fund to simplify your investment strategy. This way, your holdings will automatically adjust as you get closer to your retirement date.
Cash-Balance Plans
While cash balance plans are the most common retirement options, other types are available. One of these is defined contribution (DC) plans. These plans allow a variable amount of contributions deferred for an extended period. These plans are very popular among smaller plan sponsors.
Cash-balance plans offer several benefits. The most obvious is the ability to take a lump sum benefit when you retire. Typically, this amount is about $100,000. This benefit can be rolled over to an Individual Retirement Account (IRA) or another retirement plan. Unlike traditional pension plans, you do not have to wait until retirement to access the money in your account. Also, you can roll over your cash balance to an IRA or another employer’s plan to take advantage of its tax benefits.
Cash-balance plans are also popular with employees. This retirement plan allows employees to save more money for retirement and reduce their taxable income. In addition, employers will fund the account for their employees, which results in a lower taxable income for the company. These plans also allow employees to make deductible contributions to their accounts, which is important if they want to maximize their retirement savings.
