Your Retirement 401(K) & IRA

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401k & IRA

What Is The 401(K) Scheme?

When you research information online to learn how to fund your retirement plans, you are likely to find a lot of confusing and contradictory information about the term 401(k).

Although at first glance the name may sound like a term straight out of a futuristic movie on artificial intelligence, it is only a simple retirement saving account designed to help working professionals begin a retirement fund early in life and set those aside for impending retirement.

Mutual Funds

A number of people use their 401(k) funds to invest pretax earnings and then use that money for investments into mutual funds of various kinds. There are several kinds of mutual funds, ranging from market accounts for money to aggressive high-risk stock portfolios.

In case you are employed in a company that gives you the option of signing up for a 401(k) plan, you would be squandering a wonderful opportunity by not applying for the scheme when it is yours for the taking.

402(k) plans can be given three kinds of contributions: elective contributions, non-elective contributions and matching contributions.

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Matching contributions are excellent form the employee’s perspective because the employer has to invest a predetermined matched amount into the employee’s account based on what the employee invests. Different companies have different policies for these contributions. In case the company you work for matches your amount up to a certain percentage, you should ensure that you follow up on such an offer.

This money will serve you in good stead in your life later and you should not fritter the chance away for no reason.

Elective contributions mean that the money is invested in your account before you are taxed on your income. This implies that you pay no taxes on the invested funds according to the present tax rates. It is considered an advantageous way of investing money because the deduction due to investment may put you into a lower bracket for taxation, though there is no real guarantee for this.

Since you elect you to invest your money in 401(k) instead of having it in hand as disposable income, this contribution is known as an elective contribution.

A non-elective contribution is a name given to funds deposited by your employer into your account. Generally, this money is not available to you as cash and can only be invested in your 401(k) scheme.

401 K Retirement Plan

There are rules governing and limiting the amount of money that can be invested in the 401(k) per year. The actual numbers change over time because of the changes in the cost of living with time, and if you want the correct details you should contact the IRS. After you cross 50 years of age, you are allowed to make additional contributions into your 401(k) to prepare your finances for the impending retirement.

When you research your options regarding financial planning for your retirement, you should ensure that you garner all the assistance you can from your employer in terms of retirement savings.

When you have your employer match the funds that you invest in your retirement fund, you can rest assured that that amount has been deducted from your salary according to their calculations. That way, you will be glad of every extra dollar that has gone into your savings account when it is finally time for you to retire.

Simply saving money will never give us enough funds to retire comfortably with. Investments are necessary but too risky for the average person to comprehend. Because of this, making sure that your employer matches your investment into your retirement fund ensures that you have increased investment.

Make use of this method, and derive the highest benefit you can from employer contributions, even up to the maximum amount allowed as a contribution in your 401(k), because that way your financial future is more secure.

401(K) Retirement Planning Plan: Points To Keep In Mind

Few people have a good idea of what it takes to have a good financial retirement plan in place. Statistics show that of all the employees who are given a chance to apply for a 401(k) by their employers, only an estimated 70% of those actually sign up for the plan.

In the past, several instances have occurred where unscrupulous authorities have taken undue advantage of the extra funds provided by such accounts and have encountered the worst enemy of investors with regard to the 401(k) plans as well.

Now, the better part of the story is that people learn from the mistakes they make and now there is an attempt to create a better and sturdier 401(k) plan for people across the nation.

Keeping this in mind, several advances have been made, which leave few people in a position to claim that they feel insecure about their money being in such a fund and therefore there are fewer chances of people claiming that they cannot avail of 401(k) because of various concerns.

Now the problem that remains is that that there are too many people who believe in the stability provided by an aging system of retirement benefits that is not too reliable anymore.

Social Security And Retirement

Although authorities may claim otherwise, social security is not a reliable source of income or security for people who pan to retire and are looking forward to spending their post-retirement lives in the comfort provided by a social security blanket.

There have been several pitfalls along this way. Administrators of such plans have made errors in judgment, and so have people who are at the receiving end of the plans, and as a result, you know that taking concrete steps to ensure your financial security after retirement is very important indeed.

People also learn from previous lapses that borrowing against the money that is present in your account can be much worse than a mere loss of money. Cashing out your 401(k) before you retire is an extremely imprudent decision when you look at the big picture of financial security.

Many of these lessons are learned after hard falls and can cost you several years worth of savings. Unless you feel that the risks are worth the damage you may incur, never take such steps.

You should never feel wary of making investments that may be necessary to increase the value of your 401(k). It is your financial retirement that is in question here, and any new rules that come into play regarding the 401(k) only benefit you in the long-term.

Carry out all the research required so that you are in a good position to make informed decisions. In case your eye is in stocks, then make sure that your investments are in diverse areas and that you have done a background check on the stocks you plan to invest in.

Make some time to check out the differences in the regular 401(k) and the Roth 401(k) plans and determine which suits your requirements the best in terms of spending and investing. Each plan has distinct advantages and disadvantages and deciding which one is a better plan is completely up to you in the circumstances that you are in and there are no absolute when it comes to such a question.

My recommendation would be to consult a reputable financial advisor so that you can plan and diversify your investment portfolio to maximize your savings potential with long-term investments. When you have the right financial expertise helping you out with your decisions, you can be amazed at the results that you achieve.

What Is The IRA?

When you consider the three-letter acronyms that are doing the rounds of our society, IRA only adds to the list. It may seem that it is an additional burden to worry about. However, these three letters are letters that influence our lives more than any other three-letter abbreviation that you can come across anywhere else like the FBI, CIA, NSB, AF and several others where lengthy names hide behind three-innocuous letters.

IRA, thankfully, is not as malodorous as its name may seem to you at a first glance. IRA is the most useful tool that Americans can rely on for retirement benefits when they finally stop working and think about living a comfortable retired life.

Individual Retirement Account

IRAs are actually of several different kinds, the letters standing in for the term Individual Retirement Account.

The Traditional IRA is most popularly used. There is only one requirement for such an IRA, which is your employment and the limit that your investment should not exceed your entire income or $4000 a year, whichever amount is greater until you reach 50 years of age. Once you cross 50, the maximum investment is your entire income or $5000, again, whichever amount is greater.

If your actions meet these requirements of the IRS, then these contributions to IRA are considered tax-deductible. Thus, any money you put into your IRA will not be taxable while they are in the account and held accountable only once they are withdrawn.

This is a good thing, especially for people who plan to place themselves into a lower bracket for taxation after withdrawing funds. However, these days, there is a growing trend of people turning to the advantages offered by Roth IRAs and other similar accounts, where taxes are paid upfront while rates are available, instead of risking unknown taxation later when withdrawing funds in the future because of higher rates even for a lower bracket. The wisest thing to do is consult a financial advisor and follow his advice on this issue.

In such a situation, only a financial advisor can provide you with the best advice and guidance regarding the choice that suits your requirements the best. It is also good to remember that though non-taxation for IRA funds is favorable, even by law, it is possible that your mind will change by the time you withdraw your money, by when the rates of taxes may have doubled and you will pay a lot more on those funds by the time you actually withdraw the money, thus leading to people staying with IRAs only.

Traditional IRA

Traditional IRA funds give you several benefits. A primary advantage is that the requirement for being eligible for tax deduction is quite simple. Firstly, you need to take the chance to make an investment in a separate retirement option through your employer to ensure that you are in a tax bracket that allows tax deduction.

If this requirement is not met, then your IRA is subject to federal taxation. You also need to discuss the strategies you use for purchasing of stocks to determine what is the best bet for you because “buy and hold” investors are often penalized because of capital gains achieved.

For the present circumstances, Roth IRA is considered better than the traditional IRA because your money is not tax-deductible as soon as it is invested, and nor is the investment amount of the interest received on it taxable immediately.

Traditional IRAs also have another disadvantage, which is that payments are received only after you are past the age of 70.5. With the current trend where people work late into their lives, this payment system is a serious drawback for the traditional IRA funds.

Traditional IRAs have both their pros and cons. It is imperative that you make a decision regarding which choice you are willing to live with all your life and which you would rather ignore. Such differences markedly affect the way your retirement pans out. Discuss your future goals with your financial planner and take their recommendations into account.

401(K) Vs. IRA

Several people seem to think all the available options for retirement planning and investments are more confusing than anything else. In case you too feel that way, then this article is made just for the likes of you, detailing the differences between an IRA account (Individual Retirement Account) and the 401(k) plan.

Several terms that you come across while researching the information will seem quite confusing until the terminology is well-understood by you. Financial stability post-retirement should not be as complicated as it seems to us.

Retirement Planning Advisor

It is also recommended that you take the counsel of a reputable and professional financial advisor. Competent financial advisors can provide you with the kind of guidance that will prove invaluable when it is time for you to take a decision regarding the investments you plan to make which will affect your savings for your retired life.

If we do not have any issues going to a mechanic if we need some kind of mechanical advice, then it is perfectly logical to approach a financial advisor, trained in financial dealings, to request financial advice.

Coming back to the topic at hand, for financial retirement planning, it is a good thing to know that both 401(k) and IRA accounts have advantages and disadvantages. They also have restrictions on the benefits they can provide when they are used as combinations or if they are used in a single usage. Each benefit that helps you in retirement planning and saving taxes should be carefully considered before taking the plunge.

Retirement Accounts

First, let us look at 401(k) accounts. This plan offers some benefits that are more advantageous than several other retirement plans. You might want to know that you can invest as much as 15% of your entire salary, up to a maximum of $15000 every year.

This, of course, is under the assumption that your employer does not place limits on the amount that you can invest. Money that you invest in 401(k) account is pre-taxed, so the taxes you pay are lower when you invest money this way.

A lot of people also find that having the money deducted before they actually receive it makes it less painful to see it go away. In the position of someone who has continually been observing, taxation, Fido and FICA take away money over the years, it is not any less painful for me either, but a few find it to be comforting, and that can be a very good advantage.

Eventually, and most importantly, employers will also match you on the investment that you put into the 401(k) and that significantly adds to it.

As a hardworking employee, you will appreciate this investment and boost to your savings account. You will also soon see the effect it has on the money you save for the future. Of course, it is wise to remember that the penalties for these funds are quite harsh, and you should not touch them unless you are retiring. It is best to not dig into that money until you are in an absolute state of emergency or in dire need of funds.

Individual Retirement Accounts

IRA is completely different in this sense. IRAs have more restrictions and limitations than what the 401(k) gives you, starting with the truth that in case of the 401(k) you have to be a in a very low-income category to be eligible for the tax deductions offered by this kind of an investment. IRA allows a maximum contribution of all your income or $4000, whichever amount is higher till you reach the 50the year of your life. Once you cross 50 years of age, IRA allows the contribution of $1000.

Another chief drawback of the IRA is that payments can be received only after the 70.5th year of your life. If you make withdrawals any earlier than that then you have to face heavy penalties for withdrawing funds before the specified time.

Whichever plan you decide to go ahead with, whether it is the 401(k) or the traditional IRA, you should make time to consult your financial planner to discuss the various advantages of each plan, and then only decide to make an eventual commitment.

Common Errors With 401(K)

Although it may be difficult to believe, several mistakes may be made in the process of planning your investments and financial retirement. It is unfortunate that several of such mistakes are regarding 401(k), which is capable of providing a significant impetus to your plans for retirement when used in the correct manner for portfolio building.

Often, mistakes are the only things that come to mind when we think of retirement planning and investments. It is advisable, to begin with, these mistakes so that better information can be absorbed from the following advice.

401(K) Retirement Plans

The primary mistake, and perhaps the mistake with the highest impact, is when people do not sign up for their 401(k). That is correct. People do not realize that the 401(k) is provided by the employer to offer you a certain amount of security for the future following retirement. It is a means for saving money to provide for your retired life and should never be ignored or overlooked.

A bad 401(k) scheme is also better than not having a 403(k) plan at al, and because of the strict regulations surrounding them, such bad schemes are very rare. Even more significant is the fact that when your employer offers to meet the amount in the 401(k) plan and you refuse it, then you are simply looking a gift horse in the mouth.

The second mistake committed with regard to the 401(k) is investing too little in it. Benefits are obtained only by taking a certain amount of risks. If your investment doesn’t have any risks, then you are simply putting your money into a wastebasket.

Additionally, meeting your goals for your retirement plan can prove quite an impossible task without taking any risks and the chance of a few setbacks on the way. You should not, of course, be reckless without money, but should be able to take a few calculated risks to ensure bigger payouts from the investments in your retirement plans.

Risking a tad too much is also a common error of judgment. Investing in stocks is always accompanied by a significant risk of factor. Some risks need to be addressed more gravely than others are. Firstly, stocks in themselves are a risky business, especially to newcomers in the field. Although big payouts are often received only in return for high-risk investments, it is not wise to invest a large amount of your retirement savings in stocks.

401K Investment

Another option to be avoided is an investment in company stocks. Several employees have seen their financial stability crumble because the company they work for and have invested in goes under. Companies often offer incentives for stock investment to their employees, which though tempting is a risky proposition. It is advisable to refrain from investing too much in company stock as it can create problems for your future.

In the end, the worst financial decision you can take is to borrow against the 401(k). Such a move can go wrong in various ways and the penalties you suffer as a result can be quite expensive.

These penalties are affected so that you use the money in the 401(k) for their designated purpose only. If you are left with no option but to borrow against it, in my opinion it is better to sell a kidney, as I would in such a position, than to borrow against the 401(k) and put your financial future into severe turmoil.

For your retirement and financial planning, making any mistakes with your 401(k) may prove far more damaging than imaginable. You should strive to avoid such errors to ensure a financially stable retired life for yourself.

Financial Retirement And Roth IRAs

This article is the result of my opinions, based of course on facts, but should not be taken for anything other than that. It would not be fair to not bring out information regarding the benefits of Roth IRA and place them in from of people who are smart and do their retirement planning on their own.

Several financial advisors are not prone to either advocate or dismiss this issue, and there are several valid reasons for such middling behavior. In my case, the Roth IRA seems much more advantageous than the regular IRA, because of the presence of a single reason, that is, I prefer to know exactly how much I have to pay as taxes now, rather than spend an unknown amount because of investments and their returns.

At present, I know the tax brackets and my relative position in them. I am also aware of how much tax I have to pay on my current income, income that I work hard to receive only 65% of it. These figures are all represented in the form of today’s dollar value, and I prefer paying that amount today, when I know how much I have to pay, rather than at a time when this figure will not be known to me and nor will I be aware of my actual retirement savings.

Federal Retirement Laws

Several people are quick to point out that the laws governing Roth IRA may change at any time. Although this is true, thee reverse, where the laws regarding 401(k) may be altered, is also just as true. IRS can easily decide to make a publication of tax codes an art form and release the next year’s codes in Greek, and you can be sure that the average person will never know the difference.

Sometimes, I am half convinced that they do such things even now, just to have a good laugh in private. All the jokes aside, I am much in favor of retaining maximum possible control on my money, so that I can have it when I need it, instead of writing off taxes than that I can easily pay today.

Paying taxes later than the actual due date is similar to having a credit card which has 0% interest for a whole year. However, what is rarely mentioned in bold font is that the honeymoon period is only one year, and once it is over, the percentage figure can go well over 20%. I presently have no divining powers that enable me to predict my taxable income in the future or the amount of taxes that I will be due to pay after five years, leave alone the time when retirement finally arrives for me.

Attaining the peace of mind through not having to wonder if the money I will have left after paying off all taxes is, for me, worth all the inconvenience of having to make tax payments on my funds today.

In case, you need better news to be convinced, you should peek at the next few sentences. When you decide to not pay taxes on the final amount, you actually add several thousands of dollars to your actual income by investing the maximum possible amount for 50 years or so. In case you are later and begin so that you have 30 years of investing to go, you still have considerable savings from it.

The bottom line remains that every extra year of investment adds a considerable amount to your account. However, eliminating all extraneous taxes on your income is the best way to maximize savings for your retirement plans.