Retirement Planning Options

No matter what age you happen to be when you begin thinking about saving money for retirement, understanding should always come before action. It is important that you take time to learn about some of the more common planning options that are available so that you will be able to make the best decisions regarding your financial future. For instance, knowing how to make the most of an investment plan that has contribution matching by your employer can make thousands of dollars in difference. Also, knowing about early withdrawal penalties can keep you from finding out the hard way that taking money out of your retirement account before the age of 59 ½ will cost you a 10% penalty tax.

Despite what some think, retirement accounts are not simply places for you to stash money away until you hit a certain age. Instead, they offer amazing tax and growth benefits based on your agreement to continue investing for the long term. Here are ten of the most common retirement options available today:

1. Money Purchase Pension – This type of plan is typically funded by your employer based on terms stated in the plan. Typically, the amount contributed is a percentage of what the employee earned each year. An employee may start withdrawing from this type of account between the ages of 59 ½ and 70 ½. The withdrawals can be set up as yearly amounts based on your life expectancy or as a lump sum. The withdrawn funds will be taxed just like ordinary income. Earlier withdrawals are subject to a 10% tax penalty.
2. Defined Benefit Pension – Most employers who offer a defined benefit pension use a predetermined calculation that figures out the number of years you have worked for them, then multiply that number by a preselected percentage of your annual salary, or highest 3 years of your salary. Typically, benefits from this type of pension plan are paid out in monthly installments from when you retire until the time you die.
3. Profit-Sharing Plan – Through this type of plan, an employee is able to benefit from a share of the company profits. Most employer contributions are based on a percentage the company’s annual earnings. Business owners may choose to give varying percentages of profits with each employee. Any early withdrawals from this type of plan will incur a federal tax penalty.
4. Employee Stock Ownership Plan – Instead of putting money into an employee retirement account an employer puts in company stock instead. When the employee turns 55, or has been in the stock ownership plan for at least 10 years, they can choose to diversify their company stocks 25% at a time. At age 60, they will be offered a one-time offer to diversify up to 50%.
5. Savings Plan – While employees decide how much money to contribute to their own savings plans, some employers choose to contribute as well. One benefit to this type of plan is that an employee may choose to borrow part of the saved funds. Some types of savings plans, such as the 401K plan have the benefit of being tax deductible as well.
6. Tax-Sheltered Annuities (403b) Plan – With this type of retirement plan, some employees of public education institutions, nonprofit organizations and other tax-exempt entities can contribute tax-sheltered savings toward their own retirement. Some employees choose to match the amount that employees contribute as an incentive to save more.
7. Individual Retirement Account – Individual pretax contributions are used to fund IRA accounts and can be set up by almost anyone. Institutions that can help with the setup process are brokerage firms, credit unions and banks, savings associations and mutual fund companies. You may begin to withdraw funds, penalty free, from this type of account between the ages of 50 ½ and 70 ½.
8. Simplified Employee Pension – Many small businesses offer simplified employee pensions which are funded by the employer in the form of tax-deductible contributions. These contributions go into the employee’s traditional IRA account. A few of these types of pensions also allow the employee to contribute as well.
9. Self-employed Plan – Designed for those who are self-employed, this type of plan is 100% self-funded. The amassed funds can be invested just as traditional IRA’s. While deductions are tax deductible, disbursed funds are subject to tax. Early withdrawal of funds from this type of account may result in a tax penalty.
10. Savings Incentive Match Plan for Employees – This type of plan can be put into place by a small business as either a deferred arrangement or IRA. When employees choose to put their pre-tax dollars into this type of fund, the employer is required to match those dollars, usually up to a certain percent.

Taking time to plan for your retirement is a critical step in the process of evaluating which type of retirement planning options are right for you. Contact us at Copelin Financial so that we can help you plan for the retirement you’ve been dreaming of. Let our experience benefit your future.