Retirement planning can seem like a confusing, overwhelming project, especially with the wide range of investment options available. While there might not seem to be much difference between a Roth IRA and a 401(k), each comes with important requirements and restrictions that can shape your financial future. Below is an overview of some of the most common types of retirement accounts.

What Are Some Common Retirement Planning Options Available to You?

1. Employer 401(k) Programs

401(k)s are employer-provided retirement accounts that allow you to contribute pretax dollars, which could lower your liability for that year. These funds will grow on a tax-deferred basis, so contributors don’t have to pay capital gains or income taxes until they start making withdrawals in retirement. If you think you’ll be in a lower tax bracket after retirement, paying taxes later can reduce your liability and maximize your long-term savings. The funds in a 401(k) are available at any time, but you’ll have to pay a significant tax penalty for any withdrawals made before age 59 ½.

2. Traditional Individual Retirement Accounts (IRAs)

Much like a 401(k), an IRA is also funded by pre-tax dollars and no annual tax on the growth of your investments. This retirement planning method is subject to many of the same restrictions as a 401(k)s, but you have more control over how the contributions are invested. The amount you can invest every year tax-deferred is also subject to limitations, based on your income level and whether your employer offers a 401(k).

3. Roth IRAs

Unlike the other two options, Roth IRA contributions are not tax deductible. However, any money earned from those investments is tax-free, and you won’t have to pay again when you make withdrawals after retirement. There’s also no tax penalty for early withdrawals and you aren’t required to start making distributions at a certain age. This makes them a useful option for those who expect their incomes to grow over time.
 

Still not sure which retirement planning option is right for you? Turn to the friendly financial advisers at Hill & Associates CPA’s. They’ve been helping clients throughout the Lincoln, NE, area plan for the future since 1993, and will take the time to explore each choice with you. Visit their website for more on their services today or call (402) 489-9300 to make an appointment and request a quote.