Retirement Fund Accounts

In planning for your retirement, you’ll want to consider funding qualified retirement plans which include a 401k, IRAs and pensions.

How a 401k Retirement Pensions Work

A 401k is an employer-sponsored retirement savings plan. Each time you are paid – weekly, bimonthly, etc -- your employer will deduct whatever contribution you elect to fund your 401k. Since your employer administers the plan under certain pension laws and regulations, the company also determines who is eligible for the plan and the maximum percentage you as an employee can contribute to the plan. Some employers match or add a certain percentage of your contribution, but they are not required to do so.

Most companies offer you several investment options for your funds ranging from high-risk, high-yield stocks to very minimal risk bonds. You will be able to allocate your 401k contributions across this range. Your 401k-retirement pension is tax deferred, so the monies will not be taxed until you withdraw them. Furthermore your contribution is taken from gross salary, reducing your Federal income tax.

Withdrawals from your 401k before the age of 59 ½ are generally subject to a 10 percent penalty plus taxes, though depending on your company’s policy, you may be eligible to take a loan on your funds. If you change jobs, you will get to keep everything you have paid in out of your payroll deductions, but you may not get to keep the percent that your employer matched. Also when you leave your current employer, you can keep the money in the existing plan or roll it over to your new employer.

How An Individual Retirement Account (IRA) Works

The Government allows you to make tax-deductible contributions into a personal savings account called an Individual Retirement Account (IRA). You can invest your IRA retirement funds in a range of investment products, including Certificates of Deposits (CDs), stocks or bonds. The IRS sets limits on how much you can invest each year; it varies depending if you are under or over 50.

Should you withdraw the funds before 59 ½, your money will be subject to standard income taxes plus a 10 percent penalty. There are exceptions if you use the money to buy a house or fund higher education costs. Then you still pay taxes but no penalty.

Roth IRAs unlike traditional IRAs are not tax deductible, though all earnings and principal are 100 percent tax free under certain rules and regulations. After five years, you can withdraw both contributions and earnings in the account without penalty. The same benefits concerning education and housing also apply.

However, not everyone qualifies for a Roth IRA. Individuals who file taxes using single status are eligible for full contribution as long as they don't exceed $95,000 per year in earnings, and $110,000 for partial contributions. Joint filers face an earnings cap at $150,000 and $160,000 for full and partial contributions respectively.

How a Pensions Works

Historically, companies provided their retired employees with pensions or guaranteed monthly payments based on years of service and salary. The Government encouraged these pensions by offering companies generous tax breaks. Companies were required by law to keep their pension funds healthy.

In the past, company-sponsored pensions made up a significant portion of an individual’s retirement funds. Today, that has changed significantly in lieu of such plans as 401k retirement plans where the employer is not responsible for how pension money is invested and does not guarantee a certain benefit.

Some companies offer a simplified employee pension (SEP) plan in which they make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee called a SEP-IRA.