Retirement Investment Options
Many people wonder what financial tool they should get- a 401(k) or an IRA? The answer really depends on your income. If you are loaded with cash, you can contribute to both. The question you have to ask yourself is this: Are you in a position to pay tax today and earn tax free income during your retirement days or you would rather defer your tax liabilities. In a Roth IRA scheme, you have to pay your taxes pre-investment but enjoy retirement without tax liability. With a 401 (K), your investments are tax free on the way in but taxable on the way out.
Sometimes one doesn't have a choice and you have to get a 401(K). A 401(k) is a pension scheme setup by employers. If you have your own business you obviously cannot hope to make use of a 401(k) scheme. This also means an individual has to abide by the rules of the scheme provided by his current employer and the stock and investment options they have. Many companies do not have a 401(k) scheme. Moreover, what happens when you change jobs? In most cases, you have to shift your 401(k) plan to the new employer's program. The best part about a 401(k) is that your employer also contributes to the savings so you can get additional money.
With this type of plan, you can invest up to 14,000 dollars per year, which is the sum of both your contribution and that of your employer. A 401(K) is great investment if your employer is matching your contribution. If they are, you should always invest up to the that number. But since your probably will be in a higher tax bracket when you are older, you should focus more of your investments in a roth IRA, which is tax free upon withdrawal.
An IRA is for an individual person. It's just like owning a normal investment account as you can put the money in anything you want. You can hold cash, bonds, or stocks. The investment limit is $5000 a year for age 49 or below. The money you put in is after you paid taxes but it comes out tax free when you are older. However, you have to pay an early withdrawal penalty if you take money out before you are 59 1/2. You original contributions though are tax free at any time.
You should invest in both if you can but always invest in the 401k if your employer matches your contributions. You want to think about what your tax bracket will be when you are older too. If it will be higher, you would want to consider putting more money into an IRA. Both options are good and should be used but the balance of where you put the most money depends on the type of plan your employer offers and the amount of flexibility you want.
No matter what investment option you choose make sure you max out that option. Maxing them both out is better. That way you save the most money for your future and pay the least amount of taxes on it. Saving for your retirement is important and these two methods are the best way to do it. - 23162
Sometimes one doesn't have a choice and you have to get a 401(K). A 401(k) is a pension scheme setup by employers. If you have your own business you obviously cannot hope to make use of a 401(k) scheme. This also means an individual has to abide by the rules of the scheme provided by his current employer and the stock and investment options they have. Many companies do not have a 401(k) scheme. Moreover, what happens when you change jobs? In most cases, you have to shift your 401(k) plan to the new employer's program. The best part about a 401(k) is that your employer also contributes to the savings so you can get additional money.
With this type of plan, you can invest up to 14,000 dollars per year, which is the sum of both your contribution and that of your employer. A 401(K) is great investment if your employer is matching your contribution. If they are, you should always invest up to the that number. But since your probably will be in a higher tax bracket when you are older, you should focus more of your investments in a roth IRA, which is tax free upon withdrawal.
An IRA is for an individual person. It's just like owning a normal investment account as you can put the money in anything you want. You can hold cash, bonds, or stocks. The investment limit is $5000 a year for age 49 or below. The money you put in is after you paid taxes but it comes out tax free when you are older. However, you have to pay an early withdrawal penalty if you take money out before you are 59 1/2. You original contributions though are tax free at any time.
You should invest in both if you can but always invest in the 401k if your employer matches your contributions. You want to think about what your tax bracket will be when you are older too. If it will be higher, you would want to consider putting more money into an IRA. Both options are good and should be used but the balance of where you put the most money depends on the type of plan your employer offers and the amount of flexibility you want.
No matter what investment option you choose make sure you max out that option. Maxing them both out is better. That way you save the most money for your future and pay the least amount of taxes on it. Saving for your retirement is important and these two methods are the best way to do it. - 23162
About the Author:
Joe James gives financial advice for a living. He resides in the southwest of the United States and is a retirement specialist. You can find out more information at his website, http://www.figuringoutfinance.com.
posted by X - Men @ 1:15 AM
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