Planning for retirement may seem overwhelming, but understanding your options can make it easier. Here’s a simple breakdown of three common retirement plans:
- 401(k): A 401(k) is a retirement savings plan offered by many employers. With a 401(k), you can contribute a portion of your paycheck before taxes are taken out. Some employers match a percentage of your contributions, which is like free money for your retirement. The money in your 401(k) grows tax-deferred until you withdraw it in retirement. Keep in mind that there are penalties for withdrawing funds before age 59½.
- IRA (Individual Retirement Account): An IRA is a retirement account you can open on your own through a bank or financial institution. Like a 401(k), contributions to a traditional IRA are often tax-deductible, and your money grows tax-deferred. There are different types of IRAs, including Roth IRAs, which offer tax-free withdrawals in retirement, but contributions are made with after-tax dollars.
- Pension Plans: Some employers offer pension plans, also known as defined benefit plans. With a pension, your employer contributes to a fund that provides you with a set income in retirement, usually based on your years of service and salary. Unlike 401(k)s and IRAs, where your retirement income depends on your contributions and investment returns, pensions offer guaranteed income for life.
