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by the IRS to have taken a distribution of the money which triggers tax penalties. Sometimes the new employer allows the new employee the option of moving their old 401K funds into their new 401K account. Reflect on Learning: Can you list key features of a 401K employer retirement plan? Answer: Contributions are made in pretax dollars ; contributions are often matched by employers up to a percentage of the employee’s salary; accounts can grow substantially through compounding ; funds grow tax deferred ; employer’s contributions are subject to a vesting schedule ; the investments are personally selected but professionally managed ; presently, the maximum employee contribution is $18,000 , They may not be drawn on until age 59 ½ , etc. Individual Retirement Account An Individual Retirement Account (IRA) is another popular way to save for retirement. An IRA is an account that is specifically designed for saving for retirement. An IRA can be opened at a bank, financial institution, mutual fund, or life insurance company. There are several different kinds of IRAs with different rules regarding contributions, taxes, and eligibility . To be financially literate, you should know a bit about IRAs. Traditional IRA. This type of IRA can be set up by anyone who wants to save for retirement. Currently the maximum amount that can be contributed to a Traditional IRA each year is $5,500 . One great advantage of a Traditional IRA is that contributions are tax deductible . That means the account holder can deduct from their taxable income the amount of the contributions. That lowers their income taxes. Another advantage of a Traditional IRA is that the account earnings grow tax-free . The account holder doesn’t pay taxes on the money earned in the account until they start taking withdrawals. Just like a 401K, withdrawals generally cannot be taken until age 59 ½ . There is no minimum age for opening a Traditional IRA, so you can start saving for retirement now! Roth IRA. This IRA can also be set up by anyone who wants to save for retirement. Unlike a Traditional IRA, contributions are not tax deductible . However, earnings grow tax free and after age 59 ½ the distributions are not taxed . Currently, the maximum dollar amount that can be contributed to a Roth IRA each year is $5,500 . There is no minimum age for opening a Roth IRA, so you can start saving for retirement now! SIMPLE IRA. This is a retirement plan program that a small business sets up for the benefit of its employees. Like a 401K, the employee’s contribution to the IRA may be matched by the employer. In fact, SIMPLE stands for S avings I ncentive M atch P lans for E mployees. It is also available to self-employed freelancers . Employees may contribute up to $12,500 per year which may be matched up to 3% of the employee’s pay. SEP IRA. This is an IRA that a small business employer sets up on behalf of its employees. It is funded 100% by contributions from the employer. SEP stands for S implified E mployee P ension. The annual contribution limit is very high at $53,000. Another retirement plan that can be offered by small businesses is a Keogh Plan . It’s not an IRA, but has many features similar to a SEP-IRA. Reflect on Learning: Do you understand how Traditional and Roth IRAs work to build a source of retirement funds? Can you list key features? Both allow $5500 in contributions per year. Both can be started at any age . Roth PRODUCT PREVIEW
Chapter 10 | Your Risky Retirement 180
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