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Retirement Planning: IRA and 401K Plans

Jul 16, 2008
When it comes to basic retirement planning individual retirement accounts (IRA) or 401k plans play an extremely important role. When utilized correctly, you can amass a very large retirement sum with some proper planning. The earlier you start contributing to an IRA or 401k plan, the better. The key to achieving your retirement needs takes time. Market performance plays some role, but we know from past performance that the longer the time horizon, the more that can be achieved.

If you have a 401k plan available to you at your place of work, it is important that you start to contributions, as soon as possible. Many employers offer a 401k match. This means that for every dollar you contribute up to a certain limit, your employer matches, your contributions, dollar for dollar. This puts you at a tremendous advantage when planning for your retirement, as every dollar you contribute your gaining 100% return, right off the bat. Where else can you get those kind of returns? And this is before any market growth. Over time, you have the additional benefit of the market working in your favor. As you and your employer dollar cost average into your 401k account.

Now, if you're one of the unlucky individuals that don't have access to a 401k plan, contributing to an IRA account is an absolute must. You don't have the benefit of somebody adding 100% return to your account immediately, making retirement planning, even more important for you. When it comes to choosing an IRA. You have two typical choices, a traditional IRA, or a Roth IRA. Traditional IRA's allow you to contribute pretax dollars into a retirement account. This allows you to write off any retirement contributions against your tax return. The funds within the IRA account, then grow tax-deferred until withdrawn and retirement. You do, however, have to wait till you're age 59 1/2 before withdrawing without penalty. Mandatory withdrawals are required at age 70 1/2; this is called required minimum distribution, or RMD. RMD is required, so that the government is able to tax your pretax contributions. A Roth IRA, on the other hand, is a completely tax-free way to save for retirement. However, Roth IRA contributions have to be made with after-tax dollars. Depending on the amount of income you make, you may qualify for the Roth IRA. Determining which is most suitable for you, can be determined by your tax bracket and retirement.

Over the last few years, the Congress has passed laws, which enacted the Roth 401k. The Roth 401k works much like the Roth IRA, in that contributions are made with after-tax dollars and withdrawals are tax-free. Unfortunately, not all employers offer this new plan. Additionally, many employees are so attached to the tax write off that comes from traditional IRA or 401k contributions, that the traditional instruments are the more common choice. Choosing between the two is not an open and shut case, the traditional IRA might be great for some, but others may prefer the Roth IRA or 401k. The important thing here is to choose one or the other, do something, as getting started is the most important step. The earlier, we get started, the more we can put away for retirement. Just getting started at age 21, as opposed to getting started at age 31, can mean the difference of substantial amounts of money. In fact, the individual that starts at age 21 has such a large time advantage over the procrastinating 31-year-old that he can stop investing entirely when he reaches age 31, and still outpace the 31-year-old. It's important to understand that everybody's different, we all have different goals, and we all have different needs. Retirement planning is all about addressing our individual goals, and our individual needs.
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If you would like more comprehensive information on the 401k plan you can visit the site for more details. Similarly, you can also find more on the popular IRA account specifics.
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