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IRA or the Individual Retirement Account provides double benefits to the customer. In the first instance it provides Compound Interest and the additional benefit is that there is no tax on this income. This mode of saving is really good if you have the money and can afford to keep it in the account for a longer period. The benefit of compound interest, without the additional burden of tax on this amount, is a powerful incentive to contribute in the Individual Retirement Account or IRA as it is commonly known.

The IRA account is for everyone who looks forward to some relaxation and enjoyment. At being able to do the things during their twilight years which they could not do during their earning years; things like, going on a cruise, spending some romantic moments with your loved ones,  in a place which you long dreamed off, playing golf or buying gifts for your near and dear ones. IRA contributions definitely play an important part in helping you to fulfil your long cherished dreams.

Then there is the Simple IRA Plan which is for employers employing one hundred or less workers. Here, the employee contributes a percentage from each salary cheque and the employer matches the amount with the company’s contribution up to three percent or makes a fixed contribution of two percent to each employee plan. The contribution of every eligible employee is deducted from his/her payroll. The amount so deducted is then contributed to the Simple IRA plan of the employee including the employer’s contribution which is then placed with a financial institution. The financial institution can be chosen by the employee or the employer. The employer can also choose to maintain the Simple IRA investments of all the eligible employees in a single financial institution. The Simple IRA plan is also beneficial because it involves minimum paper work and saves administrative costs.

Therefore this is one plan that has. : a) Salary reduction facility (the contributions to Simple IRA are directly deducted from the salary)         b) Little or no administrative costs involved for maintaining the Plan. c) Can be started by any employer who does not presently maintain any IRA related accounts and has on his payroll less than 100 workers e) the facility where the employee can not only decide how and where to invest the money but also can transfer his/her Simple IRA plan if and when he/she leaves the present workplace and joins another organisation.

If you are an eligible employee and are about to contribute to any of the IRA plans, it helps to know some of the terms and what they mean to any IRA account holder. Most IRA plans have Annual Contribution Limits which simply means that there is a limit to your annual contribution to your IRA account. Then there are the Withdrawals or Distributions which relate to the amounts withdrawn from the account. These amounts generally consist of your additional contributions or earnings in the IRA account.  The Simple IRA account helps you to take that first step, which of course is a step in the right direction.

The Simplified Employee Pension or SEP is a retirement plan meant to encourage savings for a secure and relaxed life after retirement. The SEP though different in structure, serves the same purpose as the Individual Retirement Account (IRA). The SEP is designed for persons who are self-employed, sole proprietors, independent contractors, partnership or owner-employees of an incorporated business or trade. This plan can be applicable to any business. SEP is easy to provide, plan and execute without having to incur a lot of expense and is does not involve any complex administration work like many of the qualified retirement plans. SEP, in fact, can be established only in case of the employer having no other qualified retirement plan in force at the time.

The contributions from the employer to the Simplified Employee Pension or SEP are made at the employer’s discretion. These contributions should amount to $30,000 or 15% whichever is less and are must be deposited in the IRA account established in each and every eligible employee’s name. This is the reason why the arrangement is known as a SEP – IRA.  The employee now has the right to use the funds as these contributions are now owned by him or her. These funds can now be transferred or withdrawn by the employee at any time at his discretion. However as the SEP accounts are IRAs they are subject to all existing IRA rules and regulations governing the withdrawal, transfer and taxation.

In the traditional IRAs money can be withdrawn at any time but the withdrawals, either part or whole, will be taxed at the prevailing income tax rates. These withdrawals may also be penalized. If the withdrawals are made before attaining the age of 59 1/2 years they may attract an excise duty of 10% in addition to the income tax.  However, there are exceptions where the 10% penalty does not apply to IRA withdrawals. Those are:  A) the withdrawals made in case of the IRA owners death.   B) Due to the owners disability.     C) Medical expenses that are not reimbursed and which exceed 7 1/2% of adjusted gross income (AGI).   D)  “Substantially equal periodic payments” that are made over the life expectancy of the owner.   E) Payments made as costs of first time home purchase. These of course, are subject to a limit of $10,000.  F) Payments made as medical insurance premiums. This exception is only applicable to persons who have received unemployment compensations for over 12 weeks.  G) Payments made as back taxes in case of a levy placed against the IRA by the Internal Revenue Service and  H) Qualified expenses incurred for higher education for the IRA owner or the eligible members of the family.

It is compulsory in case of traditional IRAs, for the distributions to begin before the owner reaches the age of 70 1/2. In case the minimum required distributions are not made before this period, the balance undistributed amount will attract an excise tax of 50%. This however is not applicable to Roth (IRAs) as this IRA plan does not have any mandatory distribution requirement.

The Roth 401(k) plan is a combination of Roth IRAs and the traditional 401(k) plan. Commonly known as Roth 401(k) the plan also differs in some respect from the originals. The employer can offer the Roth 401(k) as well as the traditional plan 401(k) and the employee can contribute to both the plans but the total combined contributions to both plans are limited and should not exceed the limits set by the Internal Revenue Service for individual plans. For 2006 the limit set by the IRS is $ 15000 ($ 20,000 in case the employee is 50 years or older). However once you have decided to take part in both plans the decision will have to be final because you will not be able to switch money from one plan to another. But you have the option of choosing the amount that you want to contribute to each of your accounts. The Roth 401(k) provides you the roll over option to Roth IRA in case you move to another organisation. 

The employer is also entitled to provide a matching contribution to the Roth 401(k) plan and in case he does then two accounts have to be set up. One will contain the employee’s contribution which is deposited after deducting the relevant tax. The withdrawals from this account will be tax free. The second account will be the employer’s account where the deposit is made without any tax deduction. The withdrawals from this account are liable for tax deduction. These include the growth of investment over the period of time.

The some of the differences between the two plans Roth (k) and traditional 401(k) are: – a) the contributions by the employees to Roth 401(k), are made after deducting the taxes while in the traditional 401(k) plan the contributions are made pre-tax deductions   b) there is no further tax on the investment growth while growth in traditional 401 (k) plan is taxed only after withdrawal   c) the withdrawals of contributions and growth are tax free provided the account is held for at least 5 years and you are 59 1/2 years or older whereas in the traditional 401 (k) plan taxes are deducted by Federal and most State authorities on  withdrawals and investment growth.

You can make contributions to both Roth 401 (k) and the traditional pre-tax 401 (k) accounts in the same year but within the prescribed limits stated above. The catch-up contributions permitted in the Roth accounts for 50 years or older persons are also allowed in Roth 401 (k) plan.  

In case reporting or record keeping, you are not obliged to either report or keep a record as far as designated Roth contributions are concerned. However, if you are rolling over your account from Roth 401(k) to Roth IRA you are required to keep track of the account as per the instructions on form 8606.

A longer healthier life translates inevitably into additional years in retirement. This is the phase of life for which you have to provide income if you are to relax and enjoy these twilight years of your life.  The Social Security provisions are not enough to live the comfortable life which you were used to during your working years. You need something more and that’s where Plan 401(k) comes in. This is the powerful retirement tool that can provide you with that extra income.

The Plan is similar to the IRA account which is also, basically a retirement savings plan. However, Plan 401(k) is employer initiated and usually funded with your pre-tax salary contributions and also at times with equal employer contribution.  All contributions and growth of funds under Plan 401(k) are not taxed but any of the amounts once withdrawn is taxable according to prevalent tax laws.   However, withdrawals cannot be effected before the age of 59 1/2 years unless under special circumstances. The employers have now started to include some special loan provisions for withdrawals in this Plan.

Your contribution to this account is limited to some percentage of your pre-tax salary. This year it is $ 15,000 which is the maximum amount allowed legally. This limit may increase or decrease depending on further IRS notifications. However, if you are 50 years or older you are allowed to contribute additional amounts, which will be over and above your regular contribution, to make-up for earlier years. But you need not wait to be 50 years old to be eligible to join the Plan. You are eligible, if you are 21 years of age and an employee of an organisation that offers this Plan to its employees. But at the same time you have to be an employee of the company for a period of time not exceeding one year.

As for the employer’s contribution, it varies from employer to employer. There are those who contribute 25 to 50 per cent of your own contribution. That too is limited to some extent. At the same time under Plan 401(k), you will not be able to withdraw the company’s share of the contribution unless you have worked in the organisation for a sufficient or specified number of years.

The investments which you make for your funds in Plan 401(k) should be selected carefully. One of he reasons for this is that 401(k) options are not federally insured and any mistake is liable to prove costly. A good and planned investment strategy will definitely help to add growth to your existing investments.  All help, professional or otherwise should be taken and will prove beneficial to you.

In case you have the time, about 12 to 15 years, invest in the stock mutual funds. These are generally better performers in the long run. Stock mutual funds many a time give far better results than other options. One of the reasons for selecting this option is that Plan 401(k) does not allow frequent transfer of funds from one option to another. However, in case you leave your present employment, Plan 401(k) allows you to transfer your investment your new employer provided the transfer goes directly from your present employer to your new employer without any withdrawal.

Education IRA is a popular savings plan for all those aspiring to study in future. It provides an appreciable coverage of various education expenses including tuition fees, lodging, supplies cost and any other special costs involved during the course of education.

However, over the last few years many alternative options have developed. One of them is the Education Plan 529 Savings Plan offered by the Education Trust Board of New Mexico. This Plan 529 is available to all US residents. There are some very critical distinguishing features in Plan 529 Savings Account which gives it an edge over the Coverdell Education Savings Plan. Coverdell Education Savings Account (CESA) was formerly known as Education IRA.

The biggest distinguishing point is the limit of contribution. Maximum contributions to an Education IRA plan are $2,000 per year subject to income limits. However, contributions to 529 education plan could be a staggering $300,000 subject to income limits. If you have a plan of doing a post-graduation program at any university, then the expenses, including tuition fees, lodging, supplies, will be a minimum of $50,000. Now compare this to the paltry contribution of $2000 a year allowed in Education IRA. Obvious, you can’t meet all your education expenses with just the Education IRA account.

There are also notable differences when it comes to ownership of the account. The contribution donor has a control of the Education IRA account. However, in case of Plan 529, the account owner has the control on the account. As far as tax on the account earnings is concerned, both the plans have identical treatment. Earnings, for both the account, are tax free. The same applies to the Gift Tax parameter. If you are filing status is Single, then upto $12,000 contribution there is no gift tax. If the filing status is Joint, the limit is $24,000. The above is true for both Education IRA/CESA and Plan 529. However, there is a slight advantage in case of Plan 529. You can make a lump sum contribution of $60,000 (for Single filers) or $120,000 (for Joint filers) which covers five years of contribution. If unfortunately, the account owner dies within the 5 years then the contribution will be apportioned for the remaining term. The same may then be liable to federal and state tax.

You can also change beneficiary in both the plans anytime. The tax implications on the new beneficiary are also same for both the plans. One of the biggest drawbacks of Education IRA plan is the age limit for using the funds accumulated in your account. Education IRA funds can be used for education purpose only till the age of 30. The same limitation is not present in Plan 529.

FDIC Insurance is also an important factor to consider. Education IRA is FDIC insured but Plan 529 is not. Also the plan invests money in mutual funds and hence value can depreciate.
Education is critical to one’s success and hence the account for it. A wise selection can not only make you highly educated but also bring a lifetime happiness.

401(K) plan is one of the most critical financial instrument for any individual in US. Hence, its very important to know about the benefits and risks involved in the plan.

This plan was initially meant for the executives but it was the workers who popularised it as they found the yearly contribution limits to be higher than the limits provided to them in the Individual Retirement Account (IRA). Moreover Plan 401(k) also included a matching contribution from the employer. There is more flexibility in this plan than in the Individual Retirement Arrangement (IRA). One can also avail of loans and if required, offer the employer’s stock as an investment alternative.

The 401(k) Plan, unlike other retirement plans, allows the employees to operate their own accounts. It allows them to select the areas of investment and make suitable investments which they feel will provide them with better returns. They have a choice and can seek or reject proposals on their own terms and the investments can be made in professionally managed funds with no minimum requirements however sometimes you find that some of the retail financial service providers do have minimum investment requirements. If you have a Plan 401(k) account you can start by investing small amounts at a time. As your contributions are deducted directly from the salary the loss from the pay packet is hardly missed as you never get to see the money at the time anyway.

The contributions into this account are made from your salary amounts available before tax can be deducted. This means you save on tax until you withdraw money from your account and withdrawals are generally made after retirement. Even here there is a tax saving because the tax bracket after retirement is much lower. Therefore, the amount deducted on your withdrawals will be lesser than it would be during your working period. The result, you have more money working for you under Plan 401(k) and the growth would be that much faster.

The employer’s contribution too helps as you will have a larger fund working for you. To give an example, suppose your employer contributes 50% of your contribution then for every $ 100 that you contribute; your employer will add another $50. You get instant benefit from this facility under this plan.

You might be tempted to use funds from the employer’s contribution under Plan 401(k) to pay the down payment on your dream house. Though sometimes you are allowed to withdraw from the Plan because of hardship, you will have to pay taxes and penalties on the amount withdrawn and that too must be paid in the same year. Even if you borrow the money from the plan account you have to pay the interest which goes back into your account. The risk here is that in case you leave your job or might just lose it then you have to pay the loan in full, that too within a short period of time. In case you do not pay or are not able to in that short period then this loan is considered as withdrawal and you have to pay tax as well as penalties. At the same time you lose compound interest and overall your account becomes much smaller. Hardship withdrawal is always risky and best avoided.

The actual benefits and risk vary from person to person. However, a honest introspection of your financial position, will make the plan most beneficiary to you.