Monday, October 1, 2007

Types of Retirement Accounts

We all need to save more for our retirement years. The biggest issue and deciding factor of how much you have at retirement is twofold.

First, how early you begin to save has a significant impact on the end result. Second, the type of retirement account can mean the difference between retiring rich and retiring "comfortably".

You should know before making one of the most important decisions of your financial life that there are a vast variety of different retirement plans for us to choose from, and seeking professional advice may be the best way to figure out what fits you best.

The retirement plan we are probably all the most familiar with is the 401K plan. This plan is sponsored by our place of employment. The employee makes his or her specified contribution per paycheck.

Not every employer offers a 401k, but most bigger corporations offer it as an incentive for their employees to take advantage of.

The contributions to a 401 are made pretax, and are withdrawn directly from the individual's paycheck. Whatever an individual earns on these contributions may compound and remains tax-free until the employee has it distributed upon retirement.

The next retirement plan, and perhaps the second most well-known and commonly utilized for it's tax benefits at the opposite end is the IRA.

With the IRA, or individual retirement account, the amount a person can contribute pretax is connected to the amount earned in wages.

Using an IRA makes sense if your contributions are fully deductible or your contributions are partially deductible and you won't need the money before age 59 1/2, or if you're already maxing out your 401K.

Within the category of IRA's, there are many different types. The Keogh Plan is designed for a self employed person or a partnership.

For small businesses to set up retirement plans, there is the simplified employee pension or SEP plan. With the Roth IRA, the contributions made are not tax deductible, however, the returns will be distributed tax-free.

When contributing to a Roth IRA, your plan would be that you'll pay less in taxes now than the rate you'd pay in retirement.

You would also want to confirm with your financial advisor any tax benefits you may receive now for making contributions to your IRA, if any, as this can significantly reduce your taxable income in some cases.

A rollover IRA is meant for people who are retiring and receiving money from a 401K or for people who are leaving a job.

There are more variations to investing for retirement and far more detail to each kind of retirement account.

Review your own personal financial situation, your age (big rule of thumb, the earlier the better), your income and other variables to determine which investment option is best for you so you can retire with peace of mind.

Danna Schneider is the founder of Credit Card Directory for information on low interest credit cards, special interest credit cards, and the best deals currently going in credit. She also manages an online financial and credit info blog Credit Tips, Financial News.