Options
Retirement plans
What they are and how they
work
- Plans that help individuals set
aside money to be used after they
retire.
- Federal income tax is not immediately
due on money put into a retirement
account or on the interest it makes.
- Income tax paid when money is
withdrawn.
- Penalty charges apply if money
is withdrawn before retirement
age, except under certain circumstances.
- Income after retirement is usually
lower, so tax rate is lower.
Types
- An individual Retirement Account
(IRA) - Allows a person to
contribute up to $2,000 of earnings
per year. Contributions can be
made in installments or in a
lump sum.
- Roth IRA (also called the
IRA Plus) - While the $2,000
annual contribution to this plan
is not tax-deductible, the earnings
on the account are tax-free after
five years. The funds from the
Roth IRA may be withdrawn after
age 59 in the case of disability,
educational expenses, or for
the purchase of a first home.
- 401(k) - Allows a person
to contribute to a savings plan
from his or her pre-tax earnings,
reducing the amount of tax that
must be paid. Employer matches
contributions up to a certain level.
- Keogh Plan - Allows a
self-employed person to set aside
up to 15% of income (but not more
than $35,000 per year).
IRAs
Contributions made only between
ages of 22-30 (9 years)
- $2,000 contributed each year
- Total investment of $18,000
- At an interest rate of 9%,
by age 65 will have $579,471
Contributions made only between
ages of 31-65 (35 years)
- $2,000 contributed each year
- Total investment of $70,000
- At an interest rate of 9%,
by age 65 will have $470,249
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