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Overview: Retirement Planning Continued Identify Your Retirement Income Sources The next step is to identify your retirement income sources. Listed below are some examples of traditional sources of retirement income: PENSIONS OR DEFINED BENEFIT PLANS. Your employer may provide a defined benefit plan that will provide a fixed income after you retire. SOCIAL SECURITY. The Social Security Administration sends out annual estimates of what you can expect to receive in benefits at retirement. Social Security also maintains a Web site, www.socialsecurity.gov, where you can get more in-depth information. TAX-QUALIFIED RETIREMENT PLANS. Your employer may offer a defined contribution plan, which is a powerful tool to help you save for retirement. In addition to your own pre-tax contributions, your employer may also provide basic or matching contributions to your retirement account. (See details below.) PERSONAL SAVINGS AND INVESTMENTS. Other sources of income might include traditional or Roth IRAs, bank savings accounts, and part-time employment. (See details of Individual Retirement Accounts below.) Employer-sponsored tax-deferred retirement plans Many Americans save for their retirement through tax-deferred plans such as 401(k), 457(b) or 403(b) plans. Let’s take a look at some of the advantages of saving for retirement through one of these plans. You decide how much you want to contribute on a pre-tax basis. There are no state or federal income taxes withheld on your contributions. Taxes are payable upon withdrawal. Contributions are generally deducted from your gross pay before tax withholding is calculated, helping to reduce your taxable income while saving and investing for retirement. The Power of Pre-Tax Contributions Taxable Account Tax-qualified Savings Plan Salary $3,000 $3,000 Pre-tax contribution 0 200 Taxable income 3,000 2,800 * Federal marginal income taxes 750 700 Total take-home pay 2,250 2,100 After-tax savings 200 0 Net take-home pay $2,050 $2,100 * 25% marginal tax rate and single filer. This table is hypothetical and only an example. If does not reflect any specific investment and is not a guarantee of future income. You contribute automatically by convenient payroll reduction. Your earnings grow tax deferred until you withdraw the money, usually at retirement. The chart below compares the hypothetical results of contributing $100 each month to a taxable account and $133.33 to a tax-qualified retirement investment plan (since contributions are made pre-tax). Keep in mind that lower maximum capital gains rates may apply to certain investments in a taxable account, which would reduce the differences between performance in the accounts shown in the chart. You should consider your personal investment horizon and current and anticipated income tax brackets when making investment decisions as they may further impact the results of the comparison. This chart assumes a 25% federal marginal income tax rate and an 8% annual rate of return. Fees and charges, if applicable, are not reflected in this example, and would reduce the amount shown. Income taxes are payable upon withdrawal. Federal restrictions and tax penalties may apply to early withdrawals. Investment values will fluctuate so that an investor’s shares, when withdrawn, may be worth more or less than the original cost. This example is hypothetical and only an example. It does not reflect the return of any specific investment and is not a guarantee of future returns. You can take your account with you if you leave your current employer. Depending on plan provisions and tax laws, you may roll your account over to your next employer's plan or to your own IRA. A rollover to another tax-qualified plan can help avoid paying current income taxes and tax penalties. Individual Retirement Accounts (IRAs) or Annuities Many Americans save for their retirement by investing in IRAs. There are two types of IRAs -- traditional and Roth -- both of which are funded with after-tax dollars. The chart below compares a traditional IRA to a Roth IRA. IRA Comparison Features Traditional Roth Tax-deductible contributions Yes, if eligible (depending on income level and participation in an employer-sponsored plan) No Maximum contributions $4,000 in 2007 $4,000 in 2007 Additional catch-up contributions (age 50 and up) $1,000 $1,000 Tax-deferred growth Yes Yes Tax-free distributions No Yes, if held for five years and conditions are met Penalty-free distributions Yes, if conditions are met Yes, if conditions are met Contribution eligibility Anyone with earned income, no income restrictions Anyone with earned income who meets eligibility requirements; eligibility phases out for single filers with income levels of $99,000 to $114,000 and for married couples with income levels of $156,000 to $166,000 Required minimum distributions Start at age 70½ None Investment Vehicles Stocks, bonds, annuities, certificates of deposit Stocks, bonds, annuities, certificates of deposit < BACK NEXT > #40213