How to Retire Rich? Everything you need to know about a Retirement Account (IRA)
We all work hard through our lives hoping to retire one day and spend rest of life comfortably. Research indicates that Social Security income is never enough for a household to get by even for two weeks of the month hence it is necessary to have a substantial sum saved which can be utilized to support the ever increasing monthly expenditures. Not to mention the health care costs. It is best to start early with a Retirement Account.
Individual Retirement Account is a financial account maintained with a bank or financial institution where in the account holder can deposit funds pre-tax for a post retirement withdrawal. The deposit continues to grow and tax payment is arises only upon withdrawal. Retirement account offers a tax free growth.
Contribution to an individual retirement account not only provides the account holder a financial security post retirement but also provides a tax benefit right from enrollment. Technically speaking the tax payment on the deposit is deferred till withdrawal. Hence retirement account needs to be a part of everyone's financial plan.
As of 2013, the annual contribution limit for traditional and Roth IRA is $5500 ($6500 for age 50 or older). No contribution is permitted if age is equal to or greater than 70 1/2.
Types of Retirement accounts Broadly speaking there are four categories of Retirement accounts
1) Traditional IRA : Contributions are considered as pre-tax and this contribution is tax deductible. Withdrawals made after attaining the age of 59 1/2 are taxed at ordinary tax rate. And withdrawals made before that are subject to ordinary tax plus 10% penalty.
2) Roth IRA : Contributions are post tax hence this contribution is not tax deductible. The withdrawals however are tax free.
3) Simplified Employee Pension IRA (SEP IRA): This plan is recommended for small business owners as it includes the business owner and his/her employees. This plan is are more like profit-sharing plan wherein employers/business owner can contribute up to 25% of employee's salary. The total contribution cannot exceed $51000 (2013) and $52000 (2014). If there are no employees, the business owner can enroll him/herself.
4) Simple IRA : This is again an employer sponsored plan and is offered as an employee incentive. This plan is available if employers has less than 100 employees and is required to make a minimum contribution. Contribution limit is $12000 for all less than 50 years and $14500 for over 50 years.
Except for Roth IRA all the above plans are subject to 10% early withdrawal penalty if withdrawn before the account holder reaches the age of 59 1/2.
With thousands of plans available in the market, choosing an apt retirement plan if own a business or even if you work as an employee can get challenging and this is where you can seek our help and assistance to hand pick a right plan for you.