Are you one of the few Americans looking to save for retirement? If you are starting out on your venture to save you may not have full information on several different types of accounts available.
Each Retirement account has there own benefit and they are treated differently for tax purpose. Some accounts are funded from money you earn before any taxes are calculated. For example: If you earn $40,000 every year and you are in 25% tax bracket, you have to pay about $10,000 in taxes. Instead if you had contributed about $10,000 in retirement savings then you would have to pay $7500 in taxes. So you would save $2,500 in your taxes.
Some accounts are funded by after tax money but the money grows entirely tax free. So you do not save anything at the time of investment but you earn tax free interest. If you invest in such account you will not owe any taxes in retirement when you withdraw money.
Every account which provides tax benefits have penalties and fines associated if you withdraw money before the permitted age. There are some exceptions for which money can be withdrawn without penalties.
Now I will list some of the savings account available and type of tax benefit it provides along with the maximum limit.
Roth IRA: In this account you invest after tax money and your money accumulates tax free. The maximum contribution for year 2007 is $4000 for each individual every year. You can put your money in either Roth IRA or Traditional IRA. The combined maximum is $4000.
Traditional IRA: In this account you invest money before your tax is calculated and the money grows tax deferred. You will have to pay taxes at the time of withdrawal. The maximum contribution for year 2007 is $4000 for each individual every year. Not everyone qualifies for Traditional IRA.
401k Plan: This plan is provided by employer to give opportunity for employees to save some money before tax is calculated. The money grows tax deferred and you will owe taxes when you withdraw your money. The maximum contribution limit for 2007 is $15,500. Make sure to check out if your company matches any contribution in 401k.
Simple IRA: This is another form of plan provides by small companies to there employees to help to save for retirement. The plan is similar to 401k plan for contribution and type of investment.
Apart from these accounts there are several different types of savings opportunity for self employed people. 403b and 457 plans are also available for government and not for profit companies.
I always preferred Roth IRA so that I do not have to pay any taxes at the time of withdrawal. But every savings option has its own benefit and drawbacks. I would suggest that you do some research before investing in any one plan. You should also consult your tax planner to get idea on which savings could be better for you.