Jerry Scott should consider investing in an individual retirement account rather than opt for the employer sponsored retirement package. If she opts for the employer sponsored package like the 401k plans or other defined contribution plans , the total amount of money that will be eligible for compensation after ten years when she retires will, be her individual contributions = 4000 dollars plus interest of 8 percent per annum for ten years= 6, 194.23 plus employer contributions. Employer sponsored plans have the disadvantage of having plenty of caveats and restrictions on the usage of the contributions. For example, it is not possible to tap into the contributions of the employer immediately, and most companies have vesting rules on the contributions (Louis et al, 2011).
Employer sponsored contributions have the disadvantage of having many very complex rules that govern the withdrawal of money. There are penalties imposed in case the client pulls the funds before reaching the retirement age. There are also restrictions imposed on the total amount of money that can be contributed in the defined contributions or the defined benefit retirement plans. Most of the employer sponsored plans have a participant limit up to (45%), 45000 dollars and the employee contribution limit of 25 percent of the total amount of compensation( US department of Labor).
The contributions made on employee sponsored plans are also tax deductible. Taxation charges have a considerable impact on the total amount of compensation in many employer sponsored plans Employers also take fiduciary responsibilities (Louis et al, 2011). If Jerry smith opts for an individual retirement arrangement like the individual retirement account, the total amount that Jerry smith will be liable for compensation will be annual contribution plus the projected interest of the retirement scheme. However, the tax incentives of an individual retirement account are better than the tax incentives for employer sponsored retirement schemes and this has a considerable impact on the total amount of compensation after retirement (Louis et al, 2011).
Individual retirement plans are very flexible because it is possible to make contributions for the previous year contributions and contributions can be made at any time of the year. All the earnings made to an individual retirement account are not taxed till they are withdrawn. In Both Roth and traditional individual retirement accounts, the employee contributes 100 percent of the total amount for compensation. Another advantage of individual retirement account is that people aged 50 years and above can be allowed to make catch up contributions to increase their total amount of compensation (US Department of labor, 2006). With an individual retirement account, it is also possible for the contributor to set the maximum amount of contributions allowing the contributor to adjust the contributions in the future once the income (Louis et al, 2011).
Although the contributions made in an individual retirement accounts are not tax deductible, the withdrawals made from an individual retirement account are taxable (US department of labor, 2006). However, the tax rate for individual retirement accounts can be good tax management values for the individual because of tax savings at the time of contribution.
In The traditional IRA accounts a person gets a tax deduction for every saving made into the account. These deductions reduce the amount of taxable income so a person a person does not pay tax for IRA savings. The savings of IRA therefore grows untaxed and the capital gains of the IRA account are never included in the annual income (Us department of labor, 2006).
During withdrawal, the Money saved in IRA is not part of the ordinary income and therefore just taxed like it was ordinary income. Depending on the level of income of individual individuals can fit into a low income bracket during the working life and still enjoy a low tax during retirement. Roth individual retirement accounts payables are not tax deductible IRA Retirement schemes therefore enables a person to save money while avoiding a significant amount of taxes (Walters, 2013).
Individual retirement plans therefore offer better tax management tools and greater flexibility in money management that can increase the total amount of compensation in the long run than employee sponsored plans. Jerry Smith should therefore consider enrolling for an Individual retirement account rather than the employee sponsored retirement scheme.
References
US department of labor (2006). What you need to know about your retirement plan.
Washington: GPO FCIC publishers.
Walters K. (2013).Individual retirement plan arrangement. Retrieved from http://www.usa-
federal-state-individual-tax.com/individual_retirement.asp.
Louis et al, (2011). State and local retirement plans in the United States. New York: Edward
Elgar Publishing
