Your retirement should be a time to enjoy the fruits of your labor. To most, it’s a time to travel, spend more time with family and friends, and pursue hobbies and interests that you didn’t have time for during your working years.
But to enjoy a comfortable retirement, you need to have a solid plan in place. That means saving as much as possible and investing those savings wisely. The good news is that there are many retirement plans available to suit your needs, whether you’re looking for immediate income or tax breaks, or want to leave a legacy for your heirs.
A traditional IRA is a retirement plan which allows you to set money aside on a pre-tax basis. This means that your contributions will be withheld from your income before taxes are calculated, and you won’t be required to pay taxes until you withdraw the funds in retirement. This can be a great way to reduce your taxable income while saving up for retirement simultaneously.
Unlike a traditional IRA, the contributions in Roth IRA are made with after-tax dollars. That means you won’t get a tax break when you contribute, but your withdrawals in retirement are typically tax-free. Whereas you typically are required to start making withdrawals at age 70 ½ in the traditional IRA plan, with a Roth CalSavers IRA, you can leave the money invested for as long as needed. That makes a Roth IRA an attractive option for young investors who are just starting out in their careers. Even so, there are income limits for contributing that need to be considered with this plan.
A 401(k) is employer-sponsored and allows you to contribute pre-tax dollars that grow tax-deferred until withdrawal upon retirement. One of the biggest benefits of this plan is that many employers offer matching contributions, which boosts your savings in the long run.
Another advantage is that you can typically take out loans against your account balance if you need access to cash before retirement. However, one downside is that you may be subjected to early withdrawal penalties if you take the money out before age 59 1/2.
A 403(b) is available to employees of certain tax-exempt organizations, such as schools and hospitals. Similar to a 401(k), this plan also allows employees to save while investing on a tax-deferred basis. However, there are a few key differences that set the two plans apart.
For one, the contribution limits for a 403(b) are generally higher than those for a 401(k). Additionally, 403(b) plans often have much lower fees than 401(k)s, which makes them a great choice for employees who want to maximize their retirement savings.
There are several retirement options available, each with its set of benefits and cons. 401(k)s and 403(b)s are employer-sponsored plans that offer tax breaks and the potential for employer matching contributions. Traditional and Roth IRAs offer tax breaks on contributions but differ in terms of when taxes are paid on withdrawals. If you’re not sure where to start, talking to a financial advisor can be a great way to get started.
James Gomez is a senior contributing writer on his content team.
James specializes in content creation surrounding the topics of law, business, and lifestyle. Since earning his degree from Northeastern University, James has spent half a decade covering just about all topics that encompass law. and business.