What Are My Investment Choices For Retirement Planning?

By: Richard Callaby


Investing for retirement may not seem important yet for someone who is still in their early age. But once that age of retirement is reached, then you will feel the need to do so. It might be too late then as you will not get the most out of your investments anymore.

For those who want to start investing for their future, one of the most popular choice is the Individual Retirement Accounts. There are two options to choose: Traditional IRA and Roth IRA. These two investment tools defer the taxes on your contributions until retirement. There is a wide range of investment options available for both including stocks, mutual funds, and bonds.

Traditional IRA

Traditional IRA contributions are tax-deductible, with some restrictions. Your withdrawal upon retirement will be taxed just like an ordinary income. But if you choose to withdraw the money before age 59 , you will have to pay tax upon withdrawal plus a 10% penalty.

Traditional IRA is good for you if you think that your tax rate at retirement age will be lower than your current tax rate and if you do not plan to withdraw your money before retirement age.

Since Traditional IRA is tax-deductible, there is no minimum required contribution. The maximum, though, is currently $4000 or 100% of your annual taxable compensation, whichever is less. It will increase to $5000 by the year 2008. You can make contributions until you reach the age 70 . Beyond that, you will not be allowed to make any payments.

When you reach age 50 and you want to catch-up on your contributions, you can do so by adding $1000 to the current maximum limit. Contributions for the year are can be made from January 1 of the year until the tax filing day of the following year, which is the absolute deadline.

You can start getting funds from your Traditional IRA account once you reach age 50 without any penalty. From that age until 70 , you have the flexibility on how much you want to withdraw or opt not to withdraw yet. However, after 70 , you are required to withdraw a minimum amount annually. Withdrawing just the minimum amount will let your balance in the account continue to earn interest tax-deferred.

Roth IRA

Roth IRA contributions are not tax-deductible but withdrawals after age 59 will be subject to federal taxes. Also, you are allowed to withdraw your contributions (not the interest) anytime without having to incur penalty.

Roth IRA is best for you if you think that your tax rate will be higher upon retirement age, you may need the money before age 59 . Also, if Traditional IRA does not qualify you due to your high income, Roth IRA is a good alternative.

There is no age limit with Roth IRA. If a minor child already has a compensation for the year, a parent or guardian may file Roth IRA for the child. Also, you are allowed to make contributions even beyond 70 as long as there is still compensation.

The maximum limit of contribution is the same as Traditional IRA, as well as the catch up contributions. You can also withdraw your contributions at any time without penalty.

Other investments for retirements are also available. Most companies offer retirement plans as part of the benefits their employees receive. These IRAs can still be availed even if you have other retirement investments or plans.

It is really best to start making investments and saving for your retirement. The earlier you start, the better as your savings will earn more interest once you reach your retirement age. So, do not discount the fact that retirement is still several years from now. It is never too early to start saving.

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Richard Callaby is a Independent Computer Consultant, Writer, Author, Speaker and Instructor. More articles from this author and many other authors on personal finance can be reached at econtentking/finance.

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