The average age of retirement in the US is 62 years. However, 55% of workers plan to work in retirement.
Retirement ensures financial security for aging adults when they can no longer work because of their age. With the average spending of senior citizens being a little above $47,000 for retirees, a retirement plan is important for most individuals.
Choosing the right retirement plan is critical to having a financially secure and smooth retirement. However, with so many different types of retirement plans, this can be quite a daunting task. A proper understanding of all the various retirement plans will help you make a proper and more informed decision.
In today’s post, we’ll be highlighting the different types of retirement plans for retirees in the country and how they work.
Defined Contribution Plans (DCPs)
Defined contribution plans have been around since the 1980s and are arguably the most popular retirement plans to date. A recent survey showed that 56% of companies offer 401(k)s, a type of defined-contribution plan.
DC plans are a cluster term for a group of retirement plans, including 401(k)s and others. These retirement types are available to all employers, save for a few. It’s similar in structure to 403(b)s for public school employees and other tax-exempt individuals.
Another type of DC plan is the 457 (b) plan for state and local government employees. Let’s have an in-depth look at some of the defined contribution plans.
401(k)
401(k) plans offer a way for employees to save for retirement with a tax advantage. With this plan, an employee has to contribute a portion of their wages to their retirement benefits. The portion that they contribute will be exempt from any taxation.
The amount they save will mature tax-free until they retire and withdraw the amount. When employees retire, the amount they accrued could be subject to a taxable gain. However, retirees under 59 and a half years could be subject to a 10% tax.
Pros of 401(k)s
For a couple of reasons, 401(k)s are the retirement plan of choice for most people. Here are some of them:
Easy to save: It provides an easy way for workers to save for retirement because of automatic deductions from their paycheck. Employees can decide what amount contributes to their retirement and when to deduct it.
Good investment options: Employees can invest their retirement money in investments with high returns. Some of these investments include stocks, mutual funds, and EFTs. The best part is that you don’t have to pay any tax on any returns until you withdraw the money.
Cons of 401(k)s
That said, 401(k)s aren’t without their downsides. Here are a few cons of 401(k) plans.
Emergency fees: Employers may be penalized when they withdraw money before retirement for an emergency. Plus, some employers restrict their employees from accessing their retirement amounts completely.
Limited investment options: Although 401(k)s allow investments, your employer limits the kind of investments you can make with your retirement benefits. This locks out many other promising investment opportunities.
475 (b)
457 (b) plans are another type of defined-contribution plan that has a structure that is very similar to 401(k) plans. However, unlike 401(k)s, this plan is only available to state and local government workers.
They, too, contribute part of their income to retirement savings that aren’t subject to taxes. Like 401(k)s, the retirement amount is only taxable once the employee withdraws it.
Pros of 457(b)s
For a good reason, 457 (b) plans are a staple for state employees. Here are a few advantages of 457 (b):
Tax advantage: The plan is tax-exempt, making it an ideal option to save enough cash for retirement.
Supplemental savings: According to the IRS, 457 (b) plans are supplemental savings plans. This means you can withdraw when you’re under 59 and a half years old with no 10% tax. This is unlike most other retirement plans.
Cons of 457(b)s
Before deciding on a 457(b) retirement plan, it’s critical to weigh the pros and cons. Some of the cons of 457 (b) include:
Employer match: Unlike other options such as 401(k)s, 457(b)s do not have an employer match.
No emergency withdrawals: Withdrawals under 457(b) are extremely difficult and virtually non-existent.
IRA Plans
IRA plans define another cluster of retirement plans that the IRA oversees. This plan is an initiative by the US government to help workers save enough for retirement. There are many types of IRA plans, some of which include:
Traditional IRA
This is the most common IRA plan for all types of workers. The plan allows pre-tax retirement contributions until withdrawal. It also allows limitless investment options to boost your retirement savings.
Roth IRA
The Roth IRA is a different take on the traditional IRA plan. Unlike a traditional IRA plan, with a Roth IRA, workers have to pay tax on the money they contribute to their retirement savings. However, you won’t have to pay taxes on any earnings or contributions when it’s time to retire.
Spousal IRA
The spousal IRA plan is a special retirement plan for married couples. It allows a worker’s spouse with income to contribute to the retirement savings. However, the spouse contributing to the IRA must have a larger taxable income than any other contribution both make to the IRA.
Like most retirement plans, spousal IRAs tend to be a tad confusing. That’s why we advise workers to consider hiring retirement planning consultants to safeguard their retirement. You can learn more about retirement planning consultants and decide whether they’re right for you.
Different Types of Retirement Plans Made Easy
Now that you know the different types of retirement plans, it’s up to you to pick a plan that works for you. The best retirement plans allow various investments or offer senior citizen discounts. Start planning for your retirement today.
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