|
Retirement
Planning Options
There
are a variety of retirement planning options that can meet your needs. Your
employer funds some; you fund some. Bear in mind that in most cases, withdrawals
made before age 59 1/2 are subject to a 10 percent penalty, and withdrawals
usually must begin by April 1 of the year after you turn age 70 1/2. Income
taxes are also due upon withdrawal in most cases.
This list describes 10
of the most common options.
| A defined
benefit pension normally provides a specific monthly benefit from the
time you retire until you die. This monthly benefit is usually a percentage
of your final salary multiplied by the number of years you’ve been with
the company. Defined benefit pensions are usually funded completely by your
employer. |
| A money
purchase pension provides either a lump-sum payment or a series of
monthly payments. The size of this benefit depends on the size of the
contributions to the plan. Your employer normally funds money purchase
pension plans, although some will allow employee contributions. |
| Your employer
funds a profit-sharing plan; employee contributions are usually
optional. Upon your retirement, you will normally receive your benefit as a
lump sum. The company’s contributions — and thus your retirement benefit
— may depend on the company’s profits. If a profit-sharing plan is set
up as a 401(k) plan, employee contributions may be tax deductible. |
| A savings plan provides
a lump-sum payment upon your retirement. The employee funds savings plans,
although employers may also contribute. Employees may be permitted to borrow
a portion of vested benefits. If a savings plan is set up as a 401(k) plan,
employee contributions may be tax deductible. |
| Under an employee
stock ownership plan (ESOP), an employer periodically contributes
company stock toward an employee’s retirement plan. Upon retirement,
employee stock ownership plans may provide a single payment of stock shares.
Upon reaching age 55, with 10 or more years of plan participation, you must
be given the option of diversifying your ESOP account up to 25 percent of
the value. This option continues until age 60, at which time you have a
one-time option to diversify up to 50 percent of the account. |
| Tax-sheltered
annuities or 403(b) plans are offered by tax-exempt and
educational organizations for the benefit of their employees. Upon
retirement, employees have a choice of a lump sum or a series of monthly
payments. These plans are funded by employee contributions, and these
contributions are tax deductible. |
| Individual
retirement accounts are available to virtually any wage earner at any
salary. They are funded completely by individual contributions. IRAs are
usually held in an account with a bank, brokerage firm, insurance company,
mutual fund company, credit union, or savings association. They provide
either a lump-sum payment or periodic withdrawals upon retirement. There are
two basic types of IRAs: traditional and Roth. Contributions to traditional
IRAs may be tax deductible and are taxed upon withdrawal, whereas
contributions to Roth IRAs are not tax deductible but qualified withdrawals
are tax-free. |
| Keogh plans were
specifically designed for self-employed people. They are funded completely
by wage-earner contributions and provide either a lump-sum payment or
periodic withdrawals upon retirement. Keogh plans have the same investment
opportunities as IRAs. Contributions to Keogh plans are tax deductible
within certain generous limitations. |
| Simplified
employee pensions, or SEPs, were designed for small businesses. Like
IRAs, they can provide either a lump-sum payment or periodic withdrawals
upon retirement. Unlike an IRA, the employer primarily funds them, although
some simplified employee pensions do allow employee contributions. SEPs are
usually held in the same types of accounts that hold IRAs. Employee
contributions — in those SEPs that allow them — may be tax deductible.
Savings Incentive Match Plans for
Employees, or SIMPLE plans, were designed for small businesses. They can
be set up either as IRAs or as deferred arrangements — 401(k)s. The
employee funds them on a pre-tax basis, and employers are required to make
matching contributions. Principal and interest grow tax deferred.
Strictly speaking, annuity contracts
are not qualified retirement plans. But they do provide tax-deferred growth
like qualified retirement plans. They are also subject to withdrawal
conditions very similar to qualified retirement plans, but there are no
contribution limits. They can be used very effectively to supplement your
employer-provided retirement plan.
|
|
