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