Saving for Retirement

Roth IRA

A new type of IRA, established in the Taxpayer Relief Act of 1997, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free. Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all. Contributions to the Roth IRA are invested in mutual funds, stocks, or other securities, and the amount that someone is able to contribute is dependent upon their income, age, and tax filing status. Unique features of a Roth IRA are that it does not require you to start making withdrawals at a certain age, and also it allows an individual to make a qualified withdrawal up to $10,000 for a first time home purchase.

Traditional IRA

An IRA is a tax-deferred retirement account that permits individuals to set aside money each year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or later (or earlier, with a 10% penalty). The exact amount depends on the year and your age. Growth on contributions is tax-deferred until the funds are withdrawn.

401(k)

A retirement savings plan, established by an employer, that allows employees to send a percentage of their pre-tax compensation into a retirement account. Employers may match a percentage of the amount that the employee has withheld. If funds are withdrawn from a 401(k) before the owner is age 59.5, the proceeds are taxed at the individual’s regular rate and a 10 percent penalty is assessed. Many 401(k) plans allow employees to borrow against the money in the plan.

Annuities

Fixed Annuity: An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.

Variable Annuity: An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. The portfolio generally invests in equity securities and its performance determines the amount of this total payment.

Index Annuity: A special class of annuities that yields returns on your contributions based on a specified equity-based index. Insurance companies commonly offer a provision of a guaranteed minimum return with indexed annuities, so even if the stock index does poorly, the annuitant will have some of his downside risk of loss limited. However, it also is common for an annuitant’s yields to be somewhat lower than expected due to the combination of caps on the maximum amount of interest earned and fee-related deductions.