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