Saving for retirement is crucial and the IRS has provided several tools to help you do so.
The most common plan type is the Individual Retirement Arrangement or IRA. An IRA is like a bank account that you contribute to but can’t withdraw from until you are 59.5 years of age. As a bonus, the IRS has given IRAs special tax treatment to allow them to grow faster.
There are two types of IRAs: Traditional IRAs and Roth IRAs. With a Traditional IRA, contributions (deposits) are made with pre-tax funds and are normally removed directly from your paycheck. This type of plan is called a tax-deferred plan because taxes are paid when the funds are distributed (withdrawn) at retirement. On the other hand, Roth IRA contributions are made with post-tax funds and since tax has already been paid there is no tax on distributions at retirement.
Complementary to the above Traditional IRA, the IRS offers two employer plans: the SEP IRA and the SIMPLE IRA. These plans increase employee’s contribution limits and allow the employer to contribute to their IRA as well. 401(k)s, unlike SEPs and SIMPLEs, have no relation to Traditional IRAs other than that funds from a past employer’s 401(k) plan can be rolled-over into a Traditional IRA. Due to their relatively high cost, 401(k) plans are normally found in large companies however the plan is much more flexible than the other plans.
Unknown to most people, the IRS allows a broader rage of investments than securities. In fact, the IRS code only prohibits two investments: life-insurance and collectibles. This means that real estate, notes, LLCs, private stock, gold bullion, (and much more) are all possible investments in any of the above plans. Although these are all allowed, most administrators don’t offer them because each investment is unique and there is a high time involvement working with the client. To invest in these types of non-traditional investments, you need to move your plan to a self-directed administrator that specializes in this field of investing.