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In
this chapter:
Introduction
Retirement
savings plans
The
401(k) plan
IRAs
Roth
IRAs
The
IRA decision
How
your savings grow
Some
(minor) drawbacks
Dividing
your savings
Inflation
& taxation
A
newfangled pension
Questions
& answers
Security
and your 401(k)
The
scoop on IRAs
Your
savings priorities
If
you're self-employed
Financial
cramming
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2 3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
What
Are Retirement Savings Plans, Anyway?
Back
in the early Seventies, when Microsoft was just a glimmer in Bill
Gates’s eye, Congress decided to give savers a break by creating
tax-subsidized retirement savings programs. Today, Bill Gates
is a billionaire and probably doesn’t spend too much time worrying
about his retirement savings. But the rest of us are still blessed
with those tax-favored plans, called 401(k) plans and Individual
Retirement Accounts (IRAs).
Here’s
a rundown:
•
401(k)s are retirement savings plans available to employees
of most major companies and many small ones. 403(b) plans (also
called tax-sheltered annuities) are offered to employees of
public schools and certain religious or charitable organizations.
(Since 403(b)s are similar to 401(k)s, I’ll refer only to 401(k)s
throughout this chapter.)
•
Individual Retirement Accounts (IRAs)
are available to working people (and their non-working spouses)
and are especially attractive for those who work for companies
that do not offer retirement savings plans. There are two main
types of IRAs: traditional IRAs and Roth IRAs. I’ll get into
the details in a minute.
The
main tax-saving principle behind all of these retirement savings
plans is simple: Uncle Sam agrees not to tax the money in your
retirement account while it is accumulating interest and other
earnings. That may not sound like such a big deal. But allowing
your money to grow untaxed for many years could result in thousands
of dollars more for you over your lifetime. The effect of your
interest earning interest is known as compounding.
When money compounds without being taxed for, say, 40 years rather
than 30, it not only grows for a longer period of time, but it
also grows more quickly, as the example at the beginning of this
chapter shows.
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