Introduction
It is important to acknowledge that the type of a retirement account one selects has a significant impact on their savings and other family investments. This is the reason many economists and sociologists places a major emphasis on the need to understand the difference that exists between IRA’s, 401(k)’s , Traditional IRA and Roth IRA. The understanding of these retirements accounts greatly influences an individual’s capacity to select the best account (Reichenstein, Stephen, and William, 73). Apart from understanding the differences between the retirement accounts mentioned, it is also crucial for individuals to have knowledge concerning factors that should be considered while selecting these accounts; for instance, an individual’s level of annual or monthly income. The level of income limits, taxes and other key incentives. This paper, presents a discussion concerning the three retirement accounts, 401 (k) plans, Traditional IRA and Roth IRA, highlighting benefits and potential challenges associated with each account.
Comparison and Contrasts of 401(k), Traditional IRA and Roth IRA
In terms of income limits, any individual who is below the age of 70 and a half years is eligible to contribute to the traditional IRA (Hulse, 41). However, it is important to take note of the fact that the Roth IRA is characterized by certain eligibility restrictions, particularly on income. For example, individuals that file single taxes can only be considered eligible in an event that they have modified or changed Gross Income that does not surpass $132,000 as at 2016. In the case of married couples, Roth IRA’s requires the concerned persons to possess a modified Annual General Income in accordance with the standards of the IRS (Hulse, 41). It is also significant to recognize that there is a sharp among these accounts; in the 401(k) plan, the retirement savings are usually provided by an individual’s employer. The contributions are usually taken from an employee’s paycheck before it is subjected to taxation. However, the savings are taxed upon withdrawal by the beneficiary. In the case of Traditional IRA, it is classified as a retirement savings plan that is characterized deferred taxes, which are only imposed in an event that the savings is withdrawn. Traditional IRA accounts can be owned by individuals who also have access to the 401 (k) plan. On the other hand, the Roth IRA is characterized by tax free distributions; meaning individuals are not taxed upon retirement (Hulse, 43). Besides, eligible persons are allowed to contribute or save to the Roth IRA accounts even after passing the age of 70 and a half years.
Impact of the Investment Vehicle on Taxes
It is crucial to take note of the fact that Traditional IRA and Roth IRA give eligible persons an appropriate tax break. While traditional IRA are subjected to Federal and State taxes on an annual basis and ordinary taxes upon withdrawals made during the retirement age, Roth IRA’s does not guarantee tax breaks on individuals’ contributions; although the withdrawals are not subjected to any tax. This means that individuals who subscribe to the Roth IRA are not subjected to any form of taxation upon the withdrawal of their taxes. In the case of the 401(k) plans, eligible candidates are taxed upon the withdrawal of their retirement savings.
The most Appropriate Investment Vehicle
Company Match
A company match is also sometimes referred as an Employer Match, which could be a government entity or non-governmental organization. The Company Match is usually a package of benefits to the employees sponsored by their employers and could include benefits such as the 401(k) plans ("Company Match"). Company Matches are also important for the low-income workers because they encourage savings for the retirement age. The maximum company match contribution is usually 3 percent of the amount selected by the employee for the savings contribution (“Company Match”).
The amount of Money needed to retire comfortably
The amount of money individuals require in their accounts to retire comfortable depends on their future plans; that is, whether or not they plan to engage in future investments or spend the money on personal use. This is also usually determined by one’s annual or monthly income before the retirement age.
Most Important Assumptions made to figure out the amount of Money required for Retirement Age
Some of the most important assumptions one would make in connection with planning the amount of age required for their retirement age are; one’s current and future health conditions, future investment plans and most importantly the manner in which one plans to engage in leisure activities after their retirement age.
Investing for the Future
The investment for a secure future should begin as early as one begins earning income; however, it is important to acknowledge that investment for future usually begins from a tender age, that is, the moment one begins attending school to acquire knowledge.
Works Cited
"Company Match." What Is a 401k. N.p., n.d. Web. 29 July 2016.
Hulse, David S. "Embedded options and tax decisions: A reconsideration of the traditional vs. Roth IRA decision." Journal of the American Taxation Association 25.1 (2003): 39-52.
John, David C., and William G. Gale. "Structuring State Retirement Saving Plans: A Guide to Policy Design and Management Issues." Brookings Retirement Security Project: Washington, DC (2015).
Reichenstein, William, Stephen M. Horan, and William W. Jennings. "Two key concepts for wealth management and beyond." Financial Analysts Journal 71.1 (2015): 70-77.
