Should I Consider Retirement Plan Contributions?

Retirement plan contributions only do any good if you actually contribute.  So let’s discuss how much you can put in each type of plan, some limitations, and some reasons you actually need to put your money down.

Traditional Individual Retirement Account (IRA)

The IRA is the account open to almost all to manage their own retirement funds.  You can invest up to $5000 per year unless you’re over 50 and then you can invest $6000 per year.

ROTH Individual Retirement Account (ROTH IRA)

The ROTH IRA contribution limits are the same at the traditional for most people.  Unless you make more than $105,000 per year as a single or $167,000 as married you’ll be able to contribute.  If you make more than those limits then speak with a financial advisor to understand the phase out contribution.

Traditional 401k

The 401k allows you to contribute up to $16,500 per year unless you’re over 50 and then you can invest $22,000 per year.  For most of us we’ll be able to invest the full recommended 15% of income and never exceed these limits.

SIMPLE IRA

The SIMPLE IRA is mainly used for small companies to help with retirement of their employees.  Essentially it’s a traditional IRA for the employee that allows the employer to match retirement contributions.  It’s designed to keep the costs low for the small employer.

In 2010 the retirement plan contributions is $11,500 and $14,000 if you’re over 50.

SEP IRA
The SEP IRA is designed for the person who works for themselves or owns their own company regardless of the business classification.  In 2010 a person can contribute up to 25% of their compensation up to a maximum of $49,000 per year.

403B

The 403b plan is the equivalent of the 401k, but for public education and some non-profit organizations.  It just required different tax law due to the different tax status of the host organization.  The 403b contributions are the same as the 401k at $16,500 per year until you’re 50 and then $22,000 per year.

Section 457

The section 457 plan is primarily set up for government agencies.  The section 457 plan works like traditional 401k plans except there is no 10% tax penalty for early withdrawal only normal taxation on withdrawn money.  Also subcontractors can participate in a 457 plan which isn’t allowed with 401k plans.  The retirement plan contributions are the same at the 401k and 403b at $16,500 and $22,000 after 50 per year.

Summary

All of these plans provide tax free growth that should be more than adequate for the average person’s retirement given historical returns, enough time, and a significant amount of one’s income.  While the plan needs to be offered up by your employment you still need to choose to put money into the plan.  Use these contribution limits as targets.  Maxing your company retirement ($16,500) and IRA ($5,000) at 8% for 20 years should be worth about $1 million dollars.  If that isn’t motivation enough nothing will be.

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