| In the big world of investing, it seems we hear a lot | | | | public employees often used 457(b) plans for their |
| about what securities to invest in, but not as much | | | | contributions and for highly compensated employees |
| about what types of accounts to invest in. There are | | | | there are 457(f) plans. This eventually changed to |
| so many different types of investment accounts, each | | | | where 401(k) plans are now available to non-profit |
| covering a different purpose, and new types of | | | | companies so more and more of the non-profit sector |
| accounts seem to be created weekly. What are | | | | are opening 401(k) plans for their employees. Taxes on |
| some of the basic types of investment accounts and | | | | these types of plan can vary from one plan to |
| what can they do for you? This article covers some | | | | another, so it is best to consult your plan director or |
| of the accounts that are available currently and why | | | | talk with the investment company that manages your |
| you would use each one.Retirement AccountsIRA | | | | employers plan.Education Savings PlansEducation |
| stands for Individual Retirement Account. An IRA is | | | | plans have become available in the past decade |
| meant for those who do not have access to | | | | allowing parents to better save for their children's |
| employer sponsored retirement plans such as 401(k) | | | | education. Instead of trying to set money aside in |
| plans or those who would like to contribute more than | | | | taxable savings accounts, parents can now setup an |
| the maximum allowed by their employer plans. Why | | | | education savings account that has various tax |
| choose an IRA? Tax-deferred growth is the answer. | | | | advantages depending upon the type of account used. |
| With a standard savings account, you have to pay | | | | Choosing an education savings account depends upon |
| taxes on the interest or earnings that the account | | | | what your long-term goals are for the money. There |
| makes each year. An IRA, on the other hand, doesn't | | | | are three basic types of education savings accounts, |
| require you to pay taxes until the money is taken out in | | | | IRC section 529 plans, the Coverdell Education Savings |
| retirement, thus leaving more money in the account to | | | | Account (CESA) and the Uniform Gift to Minors |
| grow each year. In many instances you can also | | | | Account (UGMA). Each plan is tailored a little differently |
| deduct your IRA contributions on your taxes, giving you | | | | when it comes to its tax advantages and who gets |
| further tax savings. It seems like a small thing especially | | | | the money from each plan, but each has the same |
| when the account balance is still small, but over time it | | | | general purpose, to save for your children or |
| makes a big difference. Investing $10,000 for 30 years | | | | grandchildren's future.Medical Savings AccountsThere |
| in a regular savings account with a 28% tax bracket | | | | are three different types of accounts to help you save |
| and a 6% average growth rate will give you $35,565 | | | | for healthcare costs, Flexible Spending Accounts |
| whereas that same amount put into a tax-deferred | | | | (FSA), Health Reimbursement Arrangements (HRA) |
| account will give you $57,435. Eventually, however, you | | | | and Health Savings Accounts (HSA). The first of |
| do have to pay taxes on the earnings in your IRA, but | | | | these, Flexible Spending Accounts are also called |
| you are still left with $44,153 after taxes are paid. Your | | | | section 125 plans or "cafeteria plans." This plan allows |
| net gain for tax-deferred growth is just over | | | | participants to put pre-tax money into the account |
| $8500.Another individual plan is a Roth IRA. It is | | | | each year to cover health insurance deductibles, |
| somewhat similar to a traditional IRA but the difference | | | | co-payments, dental care and other medical expenses. |
| is that you cannot deduct the contributions and the | | | | Cafeteria plan money cannot accumulate from year to |
| earnings grow tax-free instead of tax-deferred. This | | | | year, however, so it needs to be used up in one year |
| type of plan is good for someone with a longer | | | | or it will be gone. The second type of medical savings |
| timeframe to invest or those whose tax bracket in | | | | account is a Health Reimbursement Arrangement. It is |
| retirement will be close to or higher than their current | | | | similar to an FSA but the employer contributes to the |
| tax rate. Tax-free growth means that you don't have | | | | account instead of the employee.The employer can |
| to pay taxes on any of the earnings in the account. If | | | | make contributions contingent on an employee |
| we start with $10,000 and invest it for 30 years at 6% | | | | participating in designated health and wellness |
| growth like our example above, you would be left with | | | | programs. In June 2002 it was updated to allow funds |
| $57,435. None of that money has to have taxes paid | | | | to rollover from year to year, but it cannot be rolled |
| on it since the initial $10,000 already had taxes taken | | | | over from employer to employer so if you change |
| out and the earnings grew tax-free. Before you | | | | employers, you loose the accrued benefit. The last and |
| wonder why anyone would not automatically use a | | | | most recently created plan is a Health Savings |
| Roth IRA, consider the fact that the initial $10,000 | | | | Account. This plan enables employees with |
| investment wasn't tax deductible like it was for the | | | | high-deductible health insurance plans to set aside and |
| traditional IRA above. With a 28% tax bracket, the | | | | invest money to use to pay the deductibles or other |
| Roth paid $2,800 on its initial $10,000 investment. If we | | | | healthcare costs in the future.These plans are |
| look at the growth potential of $2,800 for 30 years in a | | | | designed to put healthcare decisions more into the |
| tax-deferred account, it grows to $16,082. So, in this | | | | hands of the employees. These plans are also |
| person's situation where their tax bracket is the same | | | | portable so they move with you when you change |
| in retirement as it is while working with a 6% rate of | | | | employers and they can be rolled over from year to |
| growth, a Roth wouldn't be the best option. The Roth | | | | year.Other AccountsFor those who are just looking to |
| would only grow to $57,435 - $16,082 = $41,353 when | | | | invest, a brokerage account is the medium to use. |
| all taxes are taken into consideration while the | | | | Brokerage accounts are setup through investment |
| traditional IRA would grow to $44,153. There are | | | | companies to allow you to purchase securities such as |
| several online calculators that can estimate which type | | | | stocks, bonds, mutual funds, money markets, options, |
| of IRA would be to your advantage. Search under | | | | etc. Generally the money sits in a "core" account such |
| Roth vs. Traditional IRA for more information and | | | | as a money market until you are ready to invest it in |
| calculators to determine the best account for you.In | | | | other securities. There are fees for purchasing many |
| addition to individual plans there are also | | | | securities which vary depending on the company that |
| employer-sponsored plans. SEP IRA, SIMPLE IRA and | | | | the account is setup with. Brokerage accounts can |
| Keogh plans are in between Traditional Individual | | | | also offer check writing, debit and ATM cards for |
| Retirement Accounts and the standard employer | | | | easier access to money in the account. Since there |
| sponsored plans such as 401(k)'s. SEP's, SIMPLE's and | | | | are no tax-advantages of a brokerage account, |
| Keogh's are for self employed individuals or small | | | | money can be withdrawn at any time from the core |
| companies that need to put aside more money than a | | | | account. These accounts are perfect for additional |
| standard IRA allows but aren't large enough to warrant | | | | savings that you want to invest in the stock |
| the expense of a 401(k) plan. Each plan allows both | | | | market.The standard savings account is probably what |
| employee and employer contributions. Each has set | | | | everyone is most familiar with. Offered by any bank, a |
| maximums between $6,000 and $30,000, depending | | | | savings account allows you to set money aside and |
| on the plan and the contributor, and each has tax | | | | receive a variable or fixed interest rate depending |
| incentives for both the employer and the employee. | | | | upon the account. Savings accounts are very liquid and |
| These plans are great for small businesses to be able | | | | can be withdrawn at any time, but they don't allow |
| to set aside money for themselves and their | | | | check writing capabilities. Most savings accounts now |
| employees and not have to go through the time and | | | | days do offer ATM cards. Certificates of Deposit or |
| expense of larger employer sponsored plans.The last | | | | CD's are types of savings accounts that require |
| type of retirement plans are employer sponsored | | | | money to be left in for a certain period of time in |
| plans. When it comes to retirement, it seems everyone | | | | exchange for a slightly higher interest rate, these |
| knows the term 401(k). This is because a 401(k) is the | | | | accounts are less liquid and there is generally a fee to |
| retirement plan of choice for medium and large | | | | take the money out before the predetermined period |
| companies. In 2006, the maximum contribution to a | | | | of time.Whatever the reason or account used to set |
| 401(k) is $15,000. If you are over fifty and your | | | | aside money, it is always a good thing. Savings in any |
| employer offers the 401(k) "catch-up" contribution, you | | | | form creates a more secure financial future and |
| can contribute up to $5,000 more, so $20,000 total. | | | | allows for problems or emergencies to be taken care |
| Your employer may also contribute to your 401(k) plan | | | | of without having to obtain loans or dip into less liquid |
| which generally doesn't decrease your contribution | | | | savings such as a home or other physical assets. |
| allowance. Originally, 401(k) plans were only offered to | | | | Opening up any of the above types of accounts gets |
| for-profit companies. Those who worked for non-profit | | | | you started on the right track towards |
| companies such as charities, schools, universities and | | | | savings.Copyright 2006 Emma SnowEmma Snow is a |
| hospitals weren't able to contribute to 401(k) plans but | | | | writer who specializes in financial planning. She has |
| were able to open 403(b) plans which allowed most of | | | | worked in the financial industry for over eight years. |
| the same contribution limits as a 401(k). Government or | | | | |