Investing for Retirement Retirement may be a long way off for you – or it might be just around the corner. No matter how near or far it is, you’ve absolutely got to start saving for it now. However, saving for retirement isn’t what it used to be with the increase in cost of living and the instability of social security. You have to invest for your retirement, as opposed to saving for it!
Let’s start by taking a look at the retirement plan offered by your company. Once upon a time, these plans were quite sound. However, after the Enron upset and all that followed, people aren’t as secure in their company retirement plans anymore. If you choose not to invest in your company’s retirement plan, you do have other options.
STOCKS, SHARES, BONDS, MUTUAL FUNDS ETC.:
You can obviously invest in stocks, bonds, mutual funds, certificates of deposit, and money market accounts. You do not have to state to anybody that the returns on these investments are to be used for retirement. Just simply let your money grow overtime, and when certain investments reach their maturity, reinvest them and continue to let your money grow.
IRA AND ROTH IRA:
You can also open an Individual Retirement Account (IRA). IRA’s are quite popular because the money is not taxed until you withdraw the funds. You may also be able to deduct your IRA contributions from the taxes that you owe. An IRA can be opened at most banks.
A ROTH IRA is a newer type of retirement account. With a Roth, you pay taxes on the money that you are investing in your account, but when you cash out, no federal taxes are owed. Roth IRA’s can also be opened at a financial institution.
You pay income tax, and then make your contribution with post-tax dollars, your principal grows tax-free and you pay no further taxes on withdrawal.
The advantage of a Roth IRA over a deductible IRA is:
Roth is simple: it requires no special reporting to the IRS. (With a deductible IRA you have to report a deduction on your 1040 form when you make a contribution; on withdrawal you report the entire withdrawal amount as taxable income.)
Roth has an extra advantage if you think taxes will probably rise in the future, since you're paying now rather than later. (Of course that's a disadvantage if you think taxes will fall.)
THE 401(K) PLAN:
A 401(k) plan used to be only for someone who worked for a corporation, but no more. Owners of very small businesses now can open 401(k)s and shelter thousands more dollars than they could have in other kinds of self-employment retirement accounts. You should speak with a financial planner or accountant to help you with this.
The plans, often called individual or solo 401(k)s, are available to businesses that have no other employees beyond an owner and a spouse, although some partnerships can qualify. That means sole proprietors, owners of mom-and-pop companies, even people who work for someone else but have a side business, can open one.
They are becoming so popular that virtually every mutual fund and investment management company is offering them or plans to very soon. 401khelpcenter.com, a Portland, Ore.-based clearinghouse of plan information and analysis, maintains a lengthy document that lists providers of these plans.
A solo 401(k)'s big advantage is the opportunity to set aside much more tax-sheltered retirement money than allowed by other self-employed retirement options. But it's not just the added money you can shelter from taxes that makes the plan so appealing. It's also the account's flexibility. Solo 401(k) accounts offer new investment options and loan opportunities.
THE KEOGH PLAN:
An alternative to the solo 401(k) is the Keogh plan. A Keogh plan is a retirement plan for the self-employed professional, or the owner of an unincorporated, typically small, business and its employees. Money you place into a Keogh grows tax-free until it is withdrawn. Full-time employees must be included in a Keogh plan if they have worked for the company more than three years. You cannot take money out of your Keogh without a potential tax penalty before you turn 59½ and separate from service.
Looking For An Easy, Low-Cost Retirement Plan? Why Not Consider A SEP?
Simplified Employee Pension plans (SEPs) can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. Under a SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all employees (including the employer). A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay.
Advantages Of A SEP:
Contributions to a SEP are tax deductible and your business pays no taxes on the earnings on the investments.
You are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs.
Generally, you do not have to file any documents with the government.
Sole proprietors, partnerships, and corporations, including S corporations, can set up SEPs.
You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting the plan.
Whichever retirement investment you choose, just make sure you do choose one!
Do not depend on social security, company retirement plans, or even an inheritance that may never come. Invest in something today!
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Contributor's Note
This is an original article written and published by me last month. I hope you find it useful. Peter Blake
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