- What is retirement planning?
It is a lifelong process that deals with the retirement income actions, decisions, and goals. It is better to start planning it at the beginning of your career. It includes identifying the sources of income, assets, and risk involved. There is an estimate of future income. Retirement planning refers to strategies of financial savings, investments, and money distribution. Many great investment plans are 403(b), IRA, and 401(k)s that grow on a tax deferred basis. This planning also covers assets, income, expenses, liabilities, and life expectancy.
- Benefits of Tax Deferred Savings Plans
A Tax-Deferred Savings Plan, also known as a Pre-Tax Savings Plan, allows you to use taxes for investing. Taxes which would have otherwise been paid to the government as income tax now, can be deferred until retirement; but not before using the funds that you would have otherwise paid in taxes to receive additional earnings and gains in your retirement plan. This will allow you to save more money and it will compound tax-deferred
- Different Types of Strategies.
- Employer Tax Deferred Savings
This is a great way to save for retirement, because most people have a hard time saving, especially for their retirement. A Tax-Deferred Employer Savings Plan will fund your retirement savings plan out of your paycheck. The money is taken out of your pay check before your earnings are taxed, which means you are paying tax on a smaller amount of income and therefore you are paying less taxes while saving more money. Tax-Deferred contributions mean a lower taxable income at tax time. You’re not taxed on your income or the earnings until you withdraw it at retirement. That means your money can grow more quickly and you can save more for retirement.
Both of these plans are comparable to 401(k) plans in the private sector, where employees make pre-tax contributions. However, the participation rate is much higher in 401(k) plans. In fact, it’s estimated that 80% of eligible employees participate in 401(k) plans.
- Individual, Small Business and Self-Employed Tax-Deferred Savings Plans:
The Internal Revenue Service (IRS) allows deductions for several types of Tax-Deferred Savings Plans. One of the Tax-Deferred Savings plan options has the generic name of Individual Retirement Account (IRA). This plan can be utilized by almost everyone for retirement savings. There are also special retirement options available for individuals who are self-employed which are known as Simple and SEP IRA’s. There are differences among these options, but they do have one thing in common, they are all Tax-Deferred Savings Plans. This means you do not pay taxes on the amount contributed to your plan, nor do you pay taxes on the earnings and gains in your savings plan until you withdraw the funds in retirement.
Most plans have penalties for taking out money before age 59 1/2. There can be some exclusions for example: withdrawal for educational purposes, home purchase, health care, or permanent disability