by Edwin Ivanauskas | Tags: Personal Finance, Investing, Retirement

A 401K is a retirement plan sponsored by your employer. It is a defined contribution plan where you contribute a certain portion of your income into the account. 401K accounts are popular because of two main reasons.

As a retirement investment, the 401K has both advantages and disadvantages:
Pros:

• Tax deferred until withdrawal.
• Possibility of additional contributions from employers

• Withdrawal penalties of 10% with certain exceptions.
• Lack of liquidity if the contributor needs the money for another purpose.

A further comparison of a 401K plan with other investments can be found here.

Benefits of a 401K

First they are a tax deferred plan, as an example let's say you put $4,000 dollars into the account over a year and earned $54,000 that year, only $50,000 would have to be claimed as income. On the other hand, the benefits upon withdrawal once you've retired are taxed as income. Second, employers may offer a matching contribution giving you a strong incentive to deposit into the 401K account because of the increase in assets gained if employers match the deposit.

The tax deferment option can be advantageous because retirees generally require fewer expenses than during their career so can live off of a smaller yearly income. This drives them to a lower tax bracket so they have to pay less on the withdrawals from their 401K than they would have paid during their working years.

Although a 401K is an employer provided benefit, if you were to change employers and your new employer has a 401K plan, you can transfer your old 401K plan to the new employer. If your new employer does not offer a 401K plan, it can be transferred to an IRA at another institution or the old employer may charge a fee to keep the 401K managed through them.

The money deposited in a 401K is distributed among a variety of assets that could include stocks, bonds, mutual funds, money market funds and others. The options available are based on the specific plan your employer allows and the proportion of funds in each can be regulated by the contributor manually.

Deposit Limits

401K contributions are limited to a maximum of $16,500 a year in 2009. People age 50 or older are allowed an exception to this limit in the form of "catch-up" contributions. These catch up contributions are limited to $5,500 in 2009. These limits are also imposed if more than one 401K (such as a traditional and Roth) are owned by the same person, there can be no more than $16,500 contributed to both accounts combined. These limits are set by the IRS and can differ from the limits set by your employer's plan which may limit it based on a % of yearly income.

Withdrawing Funds from a 401K

The current age requirement to begin withdrawing funds from a 401K is set at 59 ½. At this point withdrawals can freely be made with no penalty, but an income tax must still be paid. If withdrawals are made before this point, there is a 10% tax added on to the income tax for the withdrawal.

There are a few exceptions to this rule. Some plans may allow the employee to take a loan out from their 401K plan. Loan conditions can vary greatly based on individual plans offered by employers but won't exceed 5 years and will be a reasonable income rate. The income is then paid back and added to the 401K account but does not get the tax deferred treatment that regular deposits get.

In addition to the available loan, 401K plans will not suffer the 10% withdrawal fee if the contributor dies, is disabled or cannot work any longer. If upon leaving the employer which holds the plan, the employee cannot find another plan to transfer the funds to such as an IRA or a new 401K, the funds can be distributed without penalty.

Types of 401K plans

All of the above information was in reference to a traditional 401K plan, the following is a list of non-traditional 401K plans available and how they differ from the traditional plan.

Roth 401K

A Roth 401K differs from a traditional 401K primarily in that it is does not have a tax-deferred contribution. This means that an income tax is paid on all income before the contribution is made but at the time of withdrawal, no income tax is paid. There are additional restrictions associated with a Roth 401K. The $16,500 limit is imposed on a combination of traditional and Roth 401K that an employee may have so they cannot invest $16,500 in two separate accounts.

SIMPLE 401K

This is a type of 401K plan available to companies with 100 or fewer employees. The employees eligible must have received at least $5,000 in pay from the company in the last year. Traditional 401K plans have a requirement for the employer to test whether the higher compensated employees in the company are being treated as equally as lower paid employees. The SIMPLE 401K eliminates those testing requirements so allows small businesses to provide retirement benefits to their employees without high costs. One difference is that the SIMPLE 401K has a lower limit of $11,500 contribution per year in contrast to the $16,400 limit in a traditional 401K.

401K plans are popular among employees and are the major source of retirement income for 44% of all workers. It is important when planning for retirement to understand the different options available and fitting them to your personal preferences. You can read more about how a 401K fits into saving for retirement and retirement investing

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by Edwin Ivanauskas | Tags: Personal Finance, Retirement

Retirement is an inevitable part of life for all working people; we will all be able to retire some day and for most of us it is something we look forward to. But what happens when we finally reach this stage in our life?

What now?

For most of us, we do not sit around and plan what we will do once we reach the magic age of 65 and decide to stop working. You may think that you will travel the globe or wile the days at home with your spouse, but let's face it, at some point you will need to get up and actually do something and the funds are probably not going to be readily available to go on that trip.

Jobs available for senior citizens

No matter what skills you have or have used in the workforce, you will surely be able to find a job. For example, if you are a retired teacher you can become a tutor. If you used to be a doctor or a nurse you can go on overseas medical missions or volunteer your time at a hospice.

If you don't need a substantial income after retirement you may want to pick up a hobby such as painting, writing, dancing, etc. After retirement you will have lots of time on your hands and if you do have the money to travel you should do it because who knows when you will have another opportunity to do so.

Volunteering

Volunteering is a great way to spend your "golden years" because it not only gives you something to do; it also gives you an opportunity to help others and gives you a feeling of satisfaction. There are many different types of volunteer work available such as working at a hospital or a hospice; there are many people in need of help at these places some of them only need companionship.

If you like the outdoors there is always something to do in your community such as planting trees or flowers or painting an old sign. You can even volunteer at a school or daycare to read to children. There are many different things to do in the community; you just have to find what you are interested in.

Life after retirement can be the best of your life, it is important to plan ahead now while you are still working so that you can ensure a better future for you and your family. Having money may not seem all that important to you, but you need it in order to survive. The power bill, electric bill, phone bill, etc. all have to get paid one way or another but keep in mind that you will be able to get a job after you are 65 if you so choose. The golden years can be some of the best years of your life, just make sure you are prepared for it.

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by Edwin Ivanauskas | Tags: Personal Finance, Retirement

Payday Loans Community Financial Services Association

The Community Financial Services Association (CFSA) has established a set of Best Practices that members of its trade association must abide by to retain membership.

Here is a list of these best practices as listed on their website here and what they mean for the consumer:

1. Full Disclosure. A member will comply with the disclosure requirements of the state in which the payday advance office is located and with Federal disclosure requirements including the Federal Truth in Lending Act. A contract between a member and the customer must fully outline the terms of the payday advance transaction. Members agree to disclose the cost of the service fee both as a dollar amount and as an annual percentage rate ("APR"). A member, in compliance with CFSA guidelines where they do not conflict with applicable federal, state or local requirements, will further ensure full disclosure by making rates clearly visible to customers before they enter into the transaction process.
   
   If the lending company is a member of the CFSA, the requirement to disclose the cost of the loan in both dollar amount and APR allows for much easier comparison between lenders for the borrower. Payday lenders are not normally required to comply with the Federal Truth in Lending Act (TILA) but members of the CFSA are. The TILA requires lenders to disclose information in a way that borrowers are far less likely to be tricked. This includes writing disclosures clearly, in a meaningful sequence in writing and the lender must allow the borrower to keep the disclosure.
   
   
2. Compliance. A member will comply with all applicable laws. A member will not charge a fee or rate for a payday advance that is not authorized by state or federal law.
   
   Although one might assume that all lenders will comply with laws and not make illegal loans, many irresponsible lenders exist due to the relative ease with which they can make money. The CFSA attempts to ensure that it's members follow all laws and regulations.
   
   
3. Truthful Advertising. A member will not advertise the payday advance service in any false, misleading, or deceptive manner, and will promote only the responsible use of the payday advance service.
   
   This is yet another clause of the CFSA Best Practices which ensures a higher standard of conduct for its member companies in an attempt to increase the reputation of the industry.
   
   
4. Encourage Consumer Responsibility. A member will implement procedures to inform consumers of the intended use of the payday advance service. These procedures will include the placement of a "Customer Notice" on all marketing materials, including all television, print, radio and on-line advertising, direct mail and in-store promotional materials.
   
   This is a very important section of the CFSA Best Practices. It moves the scope of the industry from being a predatory lending industry to being a responsible member of the larger financial services industry. CFSA members must refrain from using predatory lending tactics and instead accurately inform consumers of how payday loanss should be used and how they should not be used.
   
   
5. Rollovers. Members shall not allow customers to rollover a loan (the extension of an outstanding advance by payment of only a fee) unless expressly authorized by state law, but in such cases where authorized the member will limit rollovers to four (4) or the state limit, whichever is less.
   
   Rolling over payday loanss is a way for consumers to get into a very damaging cycle of debt. These restrictions may limit the profitability potential of CFSA members but they go a long way to making the payday loans industry a much more responsible member of the financial services industry by restricting the potential for predatory lending.
   
   
6. Right to Rescind. A member will give its customers the right to rescind, at no cost, a payday advance transaction on or before the close of the following business day.
   
   This allows borrowers some flexibility if they decide that a payday loans is not for them rather than be stuck in a loan that they have decided is not for them.
   
   
7. Appropriate Collection Practices. A member must collect past due accounts in a professional, fair and lawful manner. A member will not use unlawful threats, intimidation, or harassment to collect accounts. CFSA believes that the collection limitations contained in the Fair Debt Collection Practices Act (FDCPA) should guide a member's practice in this area.
   
   There are many horror stories of unscrupulous debt collectors calling friends and relatives, making threats, using deceitful collection techniques or just outright lying to collect a debt. The Fair Debt Collection Practices Act (FDCPA) severely restricts the use of these types of techniques by debt collectors. The compliance of to these standards by members of the CFSA does a lot to improve the image of payday lenders in the general public and indicates the desire of members to provide a financial service rather than engage in predatory lending.
   
   
8. No Criminal Action. A member will not threaten or pursue criminal action against a customer as a result of the customer's check being returned unpaid or the customer's account not being paid.
   
   This is very similar to # 7 and the payday lending company itself cannot use such unscrupulous tactics in an attempt to collect from customers. This is another attempt to increase the overall perception of the payday lending industry.
   
   
9. Enforcement.A member will participate in self-policing of the industry. A member will be expected to report violations of these Best Practices to CFSA, which will investigate the matter and take appropriate action. Each member company agrees to maintain and post its own toll-free consumer hotline number in each of its outlets.
   
   This provides a source of contact for consumers who feel they have been wronged or the company has breached the Best Practices of the CFSA. The Best Practices listed would be of no value if there wasn't a way to report breaches to the CFSA itself without relying on member companies to do the reporting.
   
   
10. Support Balanced Legislation.A member will work with state legislators and regulators to support responsible legislation of the payday advance industry that incorporates these Best Practices.
    
    This clause has little effect for consumers of payday loanss. It shows that members of the CFSA will work as a lobby organization to their state legislature as a balance between the interests of the payday lending industry and the government's responsibility to protect its citizens.
    
    
11. Extended Payment Plan.Each member will provide customers who are unable to repay a payday advance according to their original contract the option of repaying the advance over a longer period of time. Such an extended payment plan will be offered in compliance with any requirement in state law to provide an extended payment plan or, in the absence of such a requirement in state law, in compliance with the Best Practice "Guidelines for Extended Payment Plans." A member will adequately disclose the availability of the Extended Payment Plan to its customers in compliance with any requirement in state law for such a disclosure or, in the absence of such a requirement in state law, in compliance with the Best Practice "Guidelines for Extended Payment Plans."
    
    The requirement of an extended payment plan can be a cheaper alternative to constantly rolling over their debt and helps keep borrowers out of a damaging cycle of debt while still providing disincentive for borrowers to default on their debt.
    
    
12. Internet Lending.A member that offers payday advances through the Internet shall be licensed in each state where its payday advance customers reside and shall comply with the disclosure, rollover, rate, and other requirements imposed by each such state, unless such state does not require the lender to be licensed or to comply with such provisions, or the state licensing requirements and other applicable laws are preempted by federal law.
    
    
    
    
13. Display of the CFSA Membership Seal.A member company shall prominently display the CFSA Membership Seal in all stores to alert customers to the store's affiliation with the association and adherence to the association's Best Practices.
    
    This seal can be used as a very quick indicator that the lender a consumer is working with can be expected to comply with the Best Practices associated with members of the CFSA. This makes it a lot more simple for the consumer to compare payday loans lenders and know what kind of services they can expect from the lender.
    
    

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by Edwin Ivanauskas | Tags: Personal Finance, Retirement

Similarly to an employer sponsored 401k, an IRA is a tax deductible defined contribution retirement account. It does not require an employer to be a sponsor and one can be opened at a variety of financial institutions.

As a retirement investment, an Individual Retirement Account (IRA) has multiple advantages and disadvantages:

• Pros:
  • Tax deferred until withdrawal.
  • Individual, customized control of investments.
• Cons:
  • Very low yearly contribution allowance of $5,000.
  • 10% withdrawal penalty.
  • Lack of liquidity if the contributor needs the money for another purpose.

A further comparison of an IRA plan with other retirement investments can be found here.

Benefits of an Individual Retirement Account (IRA)

The most significant advantage of an IRA is that it's a tax deferred plan similar to a 401k. For example, if you are making $50,000 a year and opt to put the maximum of $5,000 a year into your IRA, your income rate for taxes will be considered $45,000. This tax deferment also means that when you withdraw the funds upon retirement, the withdrawn amount is taxed as income.

Owners of the account have an option of investments that can be funded with their IRA account. These generally include a variety of stocks, bonds and mutual funds. Investments such as real estate have further limits set in place by the individual retirement account (IRA) administrator. Collectibles and life insurance are permitted to be held in individual retirement accounts (IRA).

The tax deferment feature of an individual retirement account (IRA) is generally popular because individuals expect to have lower yearly income in their retirement years than in their working years. In this case, being taxed at their lower income rate during retirement can save money over being taxed at the higher income rate received during their working years.

Deposit Limits of an Individual Retirement Account (IRA)

The yearly deposit limit for an IRA is $5,000 in 2008 and 2009. There is an additional "catch-up" allowance of $1,000 a year for individuals 50 or older. There is a restriction on this catch-up contribution in that the owner must have already made the maximum contribution to their Individual Retirement Account (IRA) and an employer sponsored 401k. These deposit limits are also in place for a Roth IRA and the total deposit between two separate accounts can't exceed the limits listed above.

Withdrawing funds from an Individual Retirement Account (IRA)

As with a 401k, there is an early withdrawal limit on individual retirement accounts (IRA) if the money is distributed outside of the allowable exceptions. The IRA account is open to withdrawal once the owner reaches the ages of 59 ½. At the age of 70 ½ the owner is required to withdraw the minimum amount which is calculated as a combination of life expectancy of the owner, their spouse, and any beneficiaries.

Other exceptions to the penalty include:

• Medical expenses that exceed 7.5% of the owners adjusted gross income.
• Withdrawal in order to buy a first home.
• Inability to work any longer (disability).
• Costs of medical insurance while unemployed.
• Distributions to a beneficiary if the owner dies.
• Higher education expenses of the owner, their children or their grandchildren.

Types of Individual Retirement Accounts (IRA) Available

The above information is all in reference to a traditional individual retirement account (IRA). The following is a list of non-tradition IRAs available and how they differ from the traditional plan.

Roth IRA

The primary difference is that a Roth IRA is not tax deductible and the owner pays taxes on the money before it is deposited into the account. On the other hand, the money is not taxable once the owner begins to withdraw funds. Additionally, any capital gains, dividends, and interest earned in the account are not taxable. The Roth IRA also does not have a requirement to begin withdrawals by age 70 ½. There is a maximum yearly income allowed to be eligible to contribute to a Roth individual retirement account (Roth IRA). For full contributions this limit is $105,000 for single filers and $166,000 for those filing jointly.

SEP IRA

The Simplified Employee Pension Individual Retirement Account (SEP IRA) is an IRA account specifically meant for self-employed individuals and their employees. The account is shared among all members involved and uses a profit-sharing model. The contribution limits for an SEP IRA are the lesser of 25% of income or $49,000 in 2009. All members of the SEP IRA are required to make the same contribution.

Individual Retirement Accounts (IRAs) are popular among individuals who are looking to plan out their retirement. It is important when planning for retirement to understand the different options available and how to fit them into your personal preferences. You can read more about how an individual retirement account (IRA) fits into saving for retirement and retirement investing here.

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by Edwin Ivanauskas | Tags: Personal Finance, Investing, Retirement

While looking at planning your retirement, you may have noticed there are a wide variety of retirement accounts available to choose form. This article will give a detailed breakdown and comparison of the different retirement accounts to help you decide which is the best choice based on your circumstances.

Individual Retirement Account (IRA)
The Individual Retirement Account (IRA) is a tax deductible defined contribution retirement account. This means that taxes are not paid that year for any money deposited in your IRA. Instead, withdrawals made from the account upon retirement are taxed as income.

Pros:

• Tax deferred until withdrawal.
• Individual, customized control of investments.
• Tax deferral of investment growth

Cons:

• Very low yearly contribution allowance of $5,000.
• 10% withdrawal penalty.
• Lack of liquidity if the contributor needs the money for another purpose.

An individual Retirement Account allows the account holder to make investments using the funds in their retirement account. This means they can allocate the funds across a variety of stocks, bonds, and mutual funds. The importance of this is that any growth in these investments is tax deferred until withdrawal along with all funds in the account.

The negative side of this tax deferral is that the growth of investments will be taxed at your income tax rate rather than capital gains which is 15%. For the tax advantage to really come through, the funds in an Individual Retirement Account (IRA) must be allowed to have time for growth. In general, it is advantageous when the Individual Retirement Account (IRA) is allowed to grow for more than 20 years before withdrawal for the tax deferral to be advantageous.

A disadvantage of the Individual Retirement Account (IRA) is the low deposit limit of only $5,000 a year with a catch-up addition of $1,000 a year allowed for individuals 50 or older. Also, funds can be difficult to withdraw from an IRA before the designated age of 59 ½ is reached. To see a more detailed analysis of an Individual Retirement Account (IRA), read our article about the Individual Retirement Account (IRA)

When is a Roth IRA for me?

The Roth Individual Retirement Account (IRA) is an account that is not tax deferred; therefore taxes are paid on any money before it is deposited in the Roth Individual Retirement Account (IRA). This can be advantageous for individuals who expect to have a higher income upon retirement so would rather pay the current lower tax rate than a future expected higher tax rate.

When is a SEP IRA for me?

The Simplified Employee Pension Individual Retirement Account (SEP IRA) is an Individual Retirement Account (IRA) specifically meant for self-employed individuals and their employees. The account is shared among all members involved and uses a profit-sharing model. The contribution limits for an SEP IRA are the lesser of 25% of income or $49,000 in 2009. All members of the SEP IRA are required to make the same contribution.

A SEP IRA can be advantageous to a business owner due to its higher contribution allowance. It is not really an option for individual retirees who do not own a business of their own. All contribution made to the SEP IRA are made by the employer and not by employees themselves. Thus, the business owner must evaluate whether the tax benefits of expensing these costs and the increased benefits to their employees are worth the cost of increasing their own retirement contributions.

Comparison of Individual Retirement Accounts (IRA) to 401k

401k and Individual Retirement Accounts (IRA) are similar in that they both are tax-deferred retirement accounts which can increase in value over time before funds are withdrawn and they both have restrictions on fund withdrawal. One difference is that the contribution limit is only $5,000 a year for an Individual Retirement Account (IRA) while it is $16,500. A 401k also has the possibility of employer contributions in addition to your personal contributions.

In general, it is a good idea to prefer your 401k plan over your Individual Retirement Account (IRA) due to the higher limits and employer contributions. Before using this as a hard and fast rule, it is best to review what types of investments are made within your employer sponsored plan and your Individual Retirement Account (IRA) and what type of contributions are made by your employer.

Comparison of Individual Retirement Accounts (IRA) to Retirement Annuity

Both an Individual Retirement Account (IRA) and a Retirement Annuity are tax deferred retirement accounts. Unlike an Individual Retirement Account (IRA) which has a $5,000 contribution limit, a retirement annuity has no contribution limits. Both accounts have a 10% penalty for early withdrawal.

The main feature a retirement annuity has that an Individual Retirement Account (IRA) does not is its variety of guarantees. These guarantees include a guarantee to receive a minimum income per year after retirement and guarantees that the accounts value will be at a minimum level in the future. But these features come at a cost of about 3% a year in fees.

It is generally a poor idea to invest in a retirement annuity rather than an Individual Retirement Account due to these high fees charged. If the benefits being offered are worth the 3% annual fee due to your circumstances, a retirement annuity would be something to consider looking into.

401K

A 401k is a retirement account sponsored by your employer. It is a defined contribution plan where you contribute a certain portion of your income into the account.

Pros:

• Tax deferred until withdrawal
• Possibility of additional contributions from employers
• Tax deferral of investment growth

Cons:

• Withdrawal penalties of 10% with certain exceptions.
• Lack of liquidity if the contributor needs the money for another purpose.

401k and Individual Retirement Accounts (IRA) have a variety of similarities. They are both tax deferred plans to taxes are only paid on withdrawals from the account, allowing a tax-free buildup of funds and investment returns. This tax deferred features of both retirement accounts is advantageous to retirees who expect a lower income upon retirement than the income they receive during their careers.

A very large advantage of a 401k retirement account is that your employers may have a benefit where they will add funds to your account or match funds you add to the account. This is the primary advantage that a 401k has over an Individual Retirement Account (IRA) but is highly dependent on what your employer contributes.

As with the Individual Retirement Account (IRA), the 401k has a negative side if the account holder does not allow the account to be active for more than 20 years. This is due to the growth within the retirement account's investments being taxed at your income rate upon withdrawal rather than the customary 15% capital gains tax on investments. The tax advantages on investment growth are only seen after a long period of time.

When is a Roth 401k for me?

A Roth 401k, unlike a standard 401k retirement account, is taxed before the funds are placed into the account and withdrawals are made tax free. As with a Roth Individual Retirement Account (IRA), the Roth 401k is advantageous to individuals who expect their income upon retirement to be higher than their career income, therefore the tax-deferral of a standard 401k can be a negative to them.

To find out more in-depth information about 401k retirement accounts, read our article about 401k.

Comparison of 401k to Individual Retirement Account (IRA)

401k and Individual Retirement Accounts (IRA) are similar in that they both are tax-deferred retirement accounts which can increase in value over time before funds are withdrawn and they both have restrictions on fund withdrawal. One difference is that the contribution limit is only $5,000 a year for an Individual Retirement Account (IRA) while it is $16,500. A 401k also has the possibility of employer contributions in addition to your personal contributions.

In general, it is a good idea to prefer your 401k plan over your Individual Retirement Account (IRA) due to the higher limits and employer contributions. Before using this as a hard and fast rule, it is best to review what types of investments are made within your employer sponsored plan and your Individual Retirement Account (IRA) and what type of contributions are made by your employer.

Comparison of 401k to Retirement Annuity

401k and Retirement Annuities are both tax-deferred accounts in which the funds are only taxed upon withdrawal. 401k retirement accounts have an annual limit of $16,500 while a retirement annuity has no annual limit.

The main feature a retirement annuity has that a 401k does not is its variety of guarantees. These guarantees include a guarantee to receive a minimum income per year after retirement and guarantees that the accounts value will be at a minimum level in the future. But these features come at a cost of about 3% a year in fees.

It is generally a poor idea to invest in a retirement annuity rather than 401k due to these high fees charged. If the benefits being offered are worth the 3% annual fee due to your circumstances, a retirement annuity would be something to consider looking into.

Retirement Annuity

A retirement annuity is a defined contribution retirement account sold exclusively by life insurance companies. The earnings within a retirement annuity are tax deferred until withdrawal. Insurance companies can offer a variety of guarantees with their retirement annuity products, but these benefits come with extremely high fees.

Pros:

• Tax deferred growth within account
• Guaranteed benefits
• - No limits like a 401k or Individual Retirement Account (IRA)

Cons:

• Extremely high fees
• Lack of liquidity, 10% early withdrawal penalty

The main benefits of retirement annuities are the guarantees that life insurance companies provide. These can include a guarantee that you will receive a minimum income per year after retirement and guarantees that the accounts value will be at a certain level in the future. The income earned within an annuity is tax deferred upon withdrawal providing a tax shelter for potential investment growth.

These benefits come at a cost. The fees charged on annuities can be extremely large and are highly criticized in the financial world. The total amount of fees charged on an annuity are around 3% a year, a far cry from the 1% a year charged by mutual funds directly. To read a more in-depth breakdown of retirement annuities and the fees charged, read our article on Retirement Annuities.

Retirement Annuities become advantageous when an individual is willing to deal with the 3% fees to acquire the potential guarantees.

Comparison of Retirement Annuity to Individual Retirement Account (IRA) -
Both an Individual Retirement Account (IRA) and a Retirement Annuity are tax deferred retirement accounts. Unlike an Individual Retirement Account (IRA) which has a $5,000 contribution limit, a retirement annuity has no contribution limits. Both accounts have a 10% penalty for early withdrawal.

The main feature a retirement annuity has that an Individual Retirement Account (IRA) does not is its variety of guarantees. These guarantees include a guarantee to receive a minimum income per year after retirement and guarantees that the accounts value will be at a minimum level in the future. But these features come at a cost of about 3% a year in fees.

It is generally a poor idea to invest in a retirement annuity rather than an Individual Retirement Account due to these high fees charged. If the benefits being offered are worth the 3% annual fee due to your circumstances, a retirement annuity would be something to consider looking into.

Comparison of Retirement Annuity to 401k

401k and Retirement Annuities are both tax-deferred accounts in which the funds are only taxed upon withdrawal. 401k retirement accounts have an annual limit of $16,500 while a retirement annuity has no annual limit.

The main feature a retirement annuity has that a 401k does not is its variety of guarantees. These guarantees include a guarantee to receive a minimum income per year after retirement and guarantees that the accounts value will be at a minimum level in the future. But these features come at a cost of about 3% a year in fees.

It is generally a poor idea to invest in a retirement annuity rather than 401k due to these high fees charged. If the benefits being offered are worth the 3% annual fee due to your circumstances, a retirement annuity would be something to consider looking into.

Retirement Accounts Conclusions

Overall 401k retirement accounts provide the best variety of features for retirement. Individual Retirement Accounts (IRAs) are very similar to 401ks but lack the benefits of employer contributions and have lower contribution limits. It is best to deposit all funds available into your 401k until the limit is reached and if your income allows it, contribute the remainder into your Individual Retirement Account (IRA).

Retirement annuities are widely criticized and rightfully so. They provide a few features that may entice individuals to contribute but those features come at a very hefty price that isn't associated with any other type of account. Retirement annuities should only be used if your individual life circumstances make the features they provide a worthwhile sacrifice of 3% in fees every year.

In addition, each type of 401k and Individual Retirement Account (IRA) is different based on who is providing the account. This would be either your employer for a 401k or a financial institution for your Individual Retirement Account (IRA). They all provide different ways in which to manage the investments within the fund itself.

Only general recommendations can be given about which of these three main types of retirement accounts are best for individuals. Decisions must be made in an informed way while taking into account very specific circumstances of the individuals planning their retirement and deciding which retirement accounts are right for them.

To read more about how these accounts fit into retirement investing and saving for retirement, read our article about retirement investing.

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