A lot goes into your personal finances on a day to day basis as far as budget and keeping track of expenses. Don’t take only present finances into account, but future finances that go beyond a budget plan for one year as well. Human Resource may have already spoken to you about a retirement plan, but there is plenty to consider when deciding which plan is right for you. Before you decide upon which retirement fund to select, make sure you understand your current financial situation and consider questions that address the future including:
• How will your social security retirement benefit?
• How much will you need later when you do retire?
There are several different retirement fund plans that you can consider including IRA, 401K, and real estate property. Here’s a closer look at each of these different retirement fund plans to help you make the best decision.
IRA or 401(k) or should you invest in property instead?
An IRA or also known as an Individual Retirement Account will allow you to have different advantages when it comes to taxes. An IRA is tax-deferred so that the taxes are reinvested for future growth in your plan investment, but you can only put so much of your money in the plan versus all of it. Also, if you take the money out of the account before you reach your retirement (between 55and 65 years), there can be a 10% withdrawal penalty from the IRS. If you do need to take out any money before you reach your retirement age, there are exceptions, but you should speak with a Certified Public Account about it first.
A 401(k) plan will also allow you as an employee to deposit a certain amount of your salary into an individual account. An advantage to selecting a 401(k) plan is that contributions are deducted on a federal income tax return. Additionally, there are two different types of 401(k) plans: the traditional and the safe harbor plan.
The traditional 401(k) plan lets employees to select the pre-tax elective deferrals by a means of payroll deductions AND employers are able to match the contributions by performing annual tests called the Actual Deferral Percentage and Actual Contribution Percentage. These two different test help to make sure that there is no discrimination towards an employee and their deferred wages. The safe harbor 401(k) plans do not need the annual discrimination tests and an employer makes contribution such as a certain amount of money (such as $0.25 to $0.50) for each $1 that an employee earns. For either plan, there may be a specific number of years of investment in order to match the employee’s contributions.
Some people find that they prefer property investments over a pension plan for a couple different reasons. Many find that investing in property and real estate can be much more predictable, instant tax relief (which can be from 40 to 45%, however you do have to pay capital gains tax and income tax), and employer contributions. Even despite the world-wide financial crisis and the decline in value for real estate property, many people are in favor or property investments because of the return rates.
Can one have both an IRA and a 401K?
A key to a good portfolio is diversity and you can definitely have both an IRA and a 401(k) be a part of your retirement plan. If you so choose to, you can actually rollover a 401(k) into an IRA. What should be kept separate are the two different IRA accounts: Roth and traditional.
Which one to start with?
Most retirement plans from employers begin with 401(k) plans with an additional IRA plan. However, some people who work more often than others may decide the opposite and begin with an IRA and add a 401(k) plan to begin putting in money into an account sooner rather than later. If an employer does not offer a retirement plan, start with an IRA. If an employer does offer a 401(k) plan, begin with that plan because they will offer you a matching contribution.
Still need help in deciding which pension plan to choose? There many services out there such as Goldiraguide to help any additional questions you have about IRA, 401(k), and property investment plans.