Credit Karma Tidbit #4: How to Choose a Retirement Plan
When it comes to your financial well-being, it’s easy to think about the present, like which credit card you should choose or how to monitor and plan out ways to improve your credit score. But it’s much more difficult to plan for your financial future. Retirement seems so far away for many of us, but it’s something we need to start thinking about today.
Plan for your retirement today and, years from now, you can enjoy the fruits of that planning. So if you’re ready to start saving for your retirement—or if you’re already saving, but want to make sure you’ve made the right choice— check out this quick guide to find the right fund for you.
If you’re employed by a company that offers a 401(k) matching plan…
Open a 401(k). If you don’t know if your company matches your 401(k) contributions, ask! Most companies will match up to a certain percentage of your contribution, so always take full advantage of that offer. It’s free money in your nest egg.
A 401(k) plan is tax-deductible and tax-deferred, meaning you won’t be charged income taxes on the amount you contribute until you’re ready to take it out for retirement. You will earn more on the larger tax-deferred amount throughout the years before you need to worry about paying taxes on it.
Tip: With a 401(k), you invest your savings into various funds. If you choose to go with this type of fund, research how to invest and vary your investment.
Your contribution. If you can, contribute the maximum, which is $16,500 a year if you’re under 50 and $22,000 if you’re 50 or older.
If your employer doesn’t have a 401(k) matching plan or if you’re self-employed…
Open a Traditional IRA. If you have any income, you can open a Traditional IRA. Even if your employer does offer a 401(k) matching plan, you can open an IRA in addition to your 401(k) to save even more for your retirement.
A Traditional IRA is tax-deductible and tax-deferred, just like a 401(k), so you will only be charged income taxes on your contributions when you begin taking them out for retirement.
Tip: You can use your IRA to help you purchase your first home, pay for higher education, or pay for unexpected medical or disability costs. But if you need to take funds out before the age of 59.5 for any other reason, you will be penalized with an additional 10% on that income tax deduction.
Your contribution. If you can, contribute the maximum, which in 2010 was $5,000 if you’re under 50 and $6,000 if you’re 50 or older.
If you plan to use your retirement account to save for your future and the future of your loved ones…
Open a Roth IRA. While a Traditional IRA requires you to begin receiving distribution from the account after April 1 of the year you turn 70.5, a Roth IRA does not. You can allow your account to continue to grow, and you can pass it along to your heirs.
Tip: Roth IRAs are tax-exempt, meaning you’ll pay taxes on the contributions as you make them. This will benefit your heirs if you pass on your Roth IRA because they won’t have to pay the income tax.
Your contribution. If you can, contribute the maximum amount, which in 2010 was $5,000 if you’re under 50 and $6,000 if you’re 50 or older.
This is a simple guide to retirement funds. There is more to consider when you decide on which type is right for you.
Be sure to stay on top of your financial health in general by keeping a close eye on your credit score and credit health. Careful planning and wise decision-making will help you reach a happy retirement.
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