Planning Retirement with Tax Deferred Savings

There are many types of tax deferred savings. The most common is a 401k. The 401k employee retirement plan offers high maximum contribution limits and the opportunity to save interest over time. Just be sure to follow 401k withdrawal rules and understand that you'll have to pay taxes on the lump sums you take out.

If you leave your place of employment before an appropriate retirement age, you will need to pay taxes and a penalty at that time -- or roll your money over into an IRA. An Individual Retirement Account (or an IRA, for short), allows you to set aside thousands of dollars for your retirement, albeit less than a 401k. You will not have to pay taxes on the income until after age 59 1/2. You can look into all different types of IRAs to see which one you qualify for, including: a Spousal Retirement IRA, Deductible IRA or Roth IRA. With both 401ks and Deductible IRAs, you only pay taxes when you start withdrawing at retirement.

Most people are recommended to go with their employer-sponsored retirement savings plan if the company agrees to match your contributions. Next, analysts recommend that you sink some money into your Roth IRA account; while you still pay taxes on your contributions, like you normally would, you can withdraw money at any time without penalties and your withdrawals will be tax-free starting at age 59 1/2. Tax deferred Target Maturity Funds, consisting of various bonds, stocks and cash assets, are a good, low-maintenance place to invest your money as well.

To understand the difference between taxed savings and tax deferred savings, let's look at some concrete numbers. If your monthly retirement savings contribution is $250, in 20 years you would have saved $81,897 after taxes. By investing in a tax deferred savings plan, you would have saved $106,753, even after paying a lump sum tax! The interest you generate should provide a significant cushion for your retirement.

Tax deferred savings plans are just another keen trick to make your nest egg grow. However, be aware that withdrawing your money before you turn 60 could take away 10% of your money in penalties. If you feel your situation is unstable and may require you to need emergency lump sums of money, or if you plan to take out a large chunk for a retirement vacation or to buy a new house, then you should reconsider locking your money into a plan. Instead, you could go with the Roth IRA with more flexible withdrawal options or invest in mutual funds.

By now you must understand the benefits of building interest, practicing restraint and retirement planning for the future. Take advantage of tax deferred savings to plan your retirement.

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