| Topic - The Right Plan for You | Education Center |
Too many investors put off starting their retirement plans because they're befuddled by the options. Just figuring out the abbreviations of the many available retirement plans can be a chore. You might be able to invest through an IRA, Roth IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), or other type of plan, depending on a number of factors, including your income, whether or not you're self employed, and whether or not you can participate in a retirement plan sponsored by your employer.
A retirement plan is a special type of account that you can establish at a bank, brokerage, or any other financial institution, either on your own or through your employer. The U.S. government wants to encourage you to save for your own retirement, so they're willing to give you some pretty nice tax breaks to encourage you to save in these accounts, as long as you agree not to take out the money before you retire.
Once you put money into a retirement fund, the funds grow on a tax-deferred basis. That just means you won't be liable for paying taxes on any of the profits earned in your retirement account, generally until you retire and start withdrawing money.
Did you catch that? You don't have to pay taxes on the profits that you earn in a retirement account, at least until you retire when (presumably) you'll be in a lower tax bracket. Since you don't have to worry about taxes in the meantime, all your earnings will compound in the account and lead to higher returns. The end result is that your retirement account can grow and grow and grow.
But wait, it gets better. You can even get a tax break in every year that you contribute to a retirement plan. Want a way to cut your taxes? The government will give you a tax break right now if you'll contribute to your retirement plan.
What could be better than postponing taxes on your future profits and lowering your current taxes at the same time? Well, how about not paying taxes at all? Yes, some retirement accounts allow you to forget about paying taxes on the profits you earn in the account -- now or when you retire!
Never mind all the tax savings, though, since the real purpose of retirement plans is to let you slowly build wealth. During all your working years, you'll contribute to your plan. When you retire, you'll be able to enjoy your golden years free from financial worries.