RETIREMENT PLANS
401(k) Plans
If your employer offers a 401(k) plan, it may be one of the best retirement vehicles available to you. A 401(k) is a retirement savings plan to which you can contribute a certain percentage of your gross income.
However, contributions to a 401(k) and certain other qualified deferred compensation arrangements cannot exceed $15,500 in 2008. Typically, with a 401(k) plan you have several investment options from which to choose, including stocks, bonds, mutual funds or CDs.
Your employer may contribute matching funds to your 401(k) plan. For example, your employer may match 50% of your contribution for any amount up to 5% of your compensation. That means an additional 50% contribution on the first 5% you contribute to your plan. That's also why 401(k)s are so highly recommended by financial advisors.
Contributions made to a 401(k) should reduce your current income taxes as well. You do defer paying income tax on the contributions you make. Likewise, the earnings in your 401(k) grow tax-deferred until the money is withdrawn. Income tax is due when the money is withdrawn. If you withdraw money before you turn 59 1/2, however, you may also be subject to a 10% IRS penalty. While withdrawals are generally not permitted, certain 401(k) plans may permit withdrawals for "hardship" reasons, such as medical emergencies or college tuition. You do pay income tax on the amount withdrawn, and a 20% mandatory withholding generally is required from the distribution. Moreover, the hardship distribution may also be subject to the 10% IRS penalty
403(b) Tax Sheltered Annuities (TSAs)
Similar to a 401(k) plan, TSAs are retirement plans for nonprofit organizations such as schools, hospitals or social service agencies. These plans allow you to set aside a portion of your pay on a pre-tax basis, and the money invested in a TSA grows free from taxation until such time as you withdraw the money. Withdrawing money from your 403(b) plan before age 59 1/2 is generally prohibited, but there are exceptions. Certain 403(b) plans permit hardship exceptions such as purchase of a primary residence or college tuition. If you qualify for a hardship withdrawal, you will still pay a 10% early withdrawal penalty plus regular taxes. The maximum amount you can contribute to a TSA is determined by how much you make, how long you've worked for your current employer and the amount you contributed in prior years.
Individual Retirement Accounts (IRAs)
IRAs were established to encourage people to save for retirement. Subject to certain limitations, an individual generally may be able to contribute the lesser of the amounts shown below or 100% of your compensation to an IRA, and the earnings grow tax deferred until you begin withdrawals. Additionally if you are age 50 and over, you are permitted to make catch-up contributions to your IRA for years that you did not fully invest.
Your annual contribution may also be fully or partially deductible, depending on your income level and whether you are covered by another retirement plan. As with 401(k) and 403(b) plans, you may be subject to a 10% IRS penalty for premature withdrawals (generally before the age of 59 1/2), in addition to the income tax. You may have a choice of investment options for your IRA, including stocks, bonds, mutual funds or CDs. Keep in mind that your money must be in an IRA-approved account and that it must be designated as an IRA.
Keogh Plans
Keoghs are retirement plans for people who are self-employed. Usually a maximum of 25% of your net income (or a maximum of $30,000) can be contributed to these plans on a tax-deferred basis. Keoghs are more complicated than an IRA, 401(k) or 403(b), so get tax advice before setting up a plan.
