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Four Common Retirement Plans

Aug 19, 2019

Four Common Retirement Plans

In March, we shared advice for how you can live simply in retirement. Now, we’re breaking down some of the most common financial options for saving for this chapter of your life. Whether it’s decades away or right around the corner, it’s never too soon (or too late) to understand the types of plans available and start saving. Read on to learn which plan (or plans) is the best fit for you.

401(k)

One commonly-known retirement plan is a 401(k), a workplace retirement account that's offered as an employee benefit. If your employer offers a 401(k), you can contribute a portion of your pre-tax paycheck to this tax-deferred investment, which reduces the amount of income you must pay taxes on that year. You will however pay taxes on the money when you withdraw it in retirement. A great feature of a 401(k) plan is that many employers match employee contributions. If you’re able to take advantage of this benefit, it can mean a major increase in savings for you in the long term. Contributions are usually made through automatic payroll deductions, which makes saving money for retirement that much easier.

In general, when you make a withdrawal from any retirement account before age 59 ½, you will incur some kind of penalty. While there are exceptions, early 401(k) withdrawals may incur a 10 percent penalty, plus the funds will be taxed because they came from your pre-tax salary.

Roth IRAs

A Roth IRA is an individual retirement account that you can make contributions to with after-tax dollars. The benefit to this is that any money generated within the Roth IRA is never taxed again. So, if you’re new to investing and think your income, and therefore your tax bracket, will grow, putting money in a Roth IRA is a great way to save for retirement.

While you can withdraw your contributions to a Roth IRA at any time, there are different rules and penalties depending on your age and how long you’ve had the account. For example:

  • If you’ve had the account for less than 5 years and you’re younger than 59 1/2, you’ll likely owe income taxes and incur a penalty on the withdrawal.
  • If you’ve had the account for more than five years, but you’re 59 ½ or older, you won’t pay taxes or incur a penalty as long as you’re making a withdrawal for a first-time home purchase of up to $10,000, disability or death.
  • At 59 ½, if you’ve had your Roth IRA account for 5 years, you can withdraw your earnings, tax and penalty-free, at any time.

Roth 401(k)

A Roth 401(k) combines features of the Roth IRA and a 401(k) plan. Similar to a 401(k), a Roth 401(k) is offered as a benefit through an employer. With a Roth 401(k), contributions come from your after-tax paycheck rather than your pre-tax salary. Contribution limits become stricter if your modified adjusted gross income (MAGI) reaches a certain level, and contributions are banned entirely if you earn too much. If you stay in the plan for at least five years, contributions and earnings in a Roth 401(k) are never taxed again as long as the distribution is due to a disability or death, or on or after age 59 ½ .

SIMPLE IRA

If you work for a small business (1-100 employees), your employer may offer the Savings Incentive Match for Employees (SIMPLE) IRA as an employer-sponsored retirement plan. This plan is similar to a 401(k) as contributions are made with pre-tax paycheck withdrawals and the funds grow tax deferred until retirement. However, distributions taken within two years of opening the plan and before age 59 ½ can result in a hefty penalty.

Visit Our Website

PFCU offers many resources to help you plan your retirement, including financial advisors who can discuss which plan may be the best fit for you. For additional resources and to schedule a complimentary consultation, follow the links below:

Erin Ellis

Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM

 

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Please note that the amount of money contained in your investment accounts are considered non-deposit products and therefore, are not NCUA insured, not credit union guaranteed, may lose value, are not guaranteed by any government agency. Since they are not a deposit of the Philadelphia Federal Credit Union, investment accounts do not qualify for Excess Share Insurance (ESI). Securities, Financial Planning and Insurance products are offered through LPL Financial, and its affiliates, Member FINRA, SIPC. LPL Financial and Philadelphia Federal Credit Union are independent entities.