You just landed your first career job and the HR department is talking about your benefits package. It all sounds good and you enroll in your company medical, dental, vision, life insurance, and this thing called a 401(k). But what exactly is a 401(k)? Is it the only type of retirement fund out there? The truth is that while a 401(k) is one of the most popular ways to save for your eventual retirement, it is not the only option.
5 Common Types of Retirement Funds
- 401(k)- As stated above, the most popular type of retirement fund is a 401(k). Most of these are offered by your employer as part of your employee benefits package. If you are lucky enough to be in a company that has some sort of matching contribution system, you should do your best to take full advantage of this system. The money you put into your 401(k) is not taxed until you retire and start to withdraw the funds. This means more money can be invested into the stock portfolio attached to your 401(k) and helps you grow your retirement fund.
- IRA- If you are self-employed or are already contributing the maximum to a 401(k), then an Individual Retirement Account may be an option for you. The money you contribute may come out of your pre-tax income, but when you reach retirement age, you will be taxed as normal income. These accounts can be set up regardless of employment status and can be opened at a number of financial institutions.
- Roth IRA- A Roth IRA is very similar to a traditional IRA described above. One of the major differences is that taxes are taken out before you invest this money. This means you will be able to withdraw this money upon retirement without having to pay taxes. With both types of IRAs have strict contribution limitations, so you will want to consult a financial advisor before opening one of these accounts.
- 403(b)- A 403(b) plan is another type of tax-sheltered annuity retirement fund that is used by non-profit companies, religious groups, school districts, and government organizations. This allows groups with limited budgets to still help their employees save money for retirement.
- 457(b)- The 457 plans are very similar to the 403(b) options with a few major differences. If you are a current employee, you cannot take deductions until you are at least 70.5 years old. If you are no longer employed with that company, you can start taking deductions at any time without penalties. This is a unique characteristic of 457(b) plans and is not age dependent. One big drawback is that employer contributions count toward your annual contribution limit.
Many of these plans can work alongside each other, roll into one another, and are sometimes offered as multiple choices by your employer. All are good options depending on your situation, so you will need to consult a financial advisor, or a benefit specialist to determine the right fit for you.
If you are looking for more information on retirement benefits or any other employee benefit for your group, please contact us to speak to a benefit consultant.