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A Beginner's Guide to Retirement Plans

It's never too early to start thinking about your retirement plan. Whether you're just entering the workforce or already a part of it, saving now can make a big difference in your future. There are a number of retirement plans that are offered through employers depending on your job. It is important to know what they are and how you can start taking advantage of them.

Interview with Cindy Hounsell, J.D., President of Women's Institute for a Secure Retirement (WISER). As seen in We Work! Spring 2007.

The Importance of Retirement Plans

401(k)s and 403(b)s

IRAs and Roth IRAs

Online Resources

The Importance of Retirement Plans

It is important to start planning for your retirement sooner rather than later. According to the 401k.org retirement calculator, a 25-year-old employee making $35,000 a year who invests $1,000 annually into her retirement account will have roughly $708,900 by the time she retires. An employee with the same salary and investment rate who begins her retirement savings at the age of 30 will have just $462,000. That's a difference of almost $250,000! Starting earlier will literally pay off.

401(k)s and 403(b)s

A defined contribution plan, such as a 401(k) and a 403(b), is a type of retirement plan that allows an individual to save and invest money for their own retirement. In this plan, the employee, the employer, or both, contributes to the employee's individual account. The contributions are taken from an employee's pre-tax salary and the funds grow tax-free until withdrawn. The employee determines what percentage of her salary will be automatically deducted each paycheck, and how the money is invested based on options available through her company's plan. There are limits to the amount an employee can contribute to the plan each year; these are set annually by the Internal Revenue Service (IRS). Some plans contribute stocks instead of cash.

There are a number of advantages to 401(k)/403(b) plans; for instance, less money is taken out of your paycheck for taxes, capital growth of employer donation is tax-free until withdrawal, and all contributions can "rollover" from one company's plan to the next if you change jobs. After you have been an employee for a specified period of time, all company contributions to your 401(k) or 403(b) plan become yours, regardless of whether you leave the company. When you reach this point, those contributions are considered vested. Depending on your employer's policy, it may take 1-3 years of employment before you are fully vested.

However, there are also a few disadvantages to these plans. It is difficult and expensive to access your 401(k)/403(b) savings before the age of 59 ½, and because these are not traditional savings plans, they do carry some risk.

For a helpful site that includes FAQs and a 401k calculator to help calculate your projected savings, check out www.401k.org

Traditional IRAs and Roth IRAs

A traditional IRA is an individual savings plan. Contributions are tax deductible and are made up to a specified limit. Withdrawals can be made without penalty once you are 59 ½ years old and you must begin withdrawing at the age of 70 ½ . One disadvantage of a traditional IRA is that contributions cannot be made after the age of 70 ½.

A Roth IRA is also essentially an individual savings plan; however contributions are taxed when you deposit them into the account instead of when you withdraw them. Given the amount of interest you earn over the years, avoiding the taxes on the withdrawal end can save you a lot of money. Roth IRA's are not tax-deductible and there is a maximum contribution amount for those under and over age 50. You can continue to make contributions to a Roth IRA even after the age of 70 ½. Withdrawals can be made once you reach 59 ½ as long as you have had the account for over 5 years.

Note: There are annual contribution limits for both traditional and Roth IRAs, typically based on an individual's annual income. Over the next three years, the IRS will be setting new annual contribution limits for both types of account.

Learn More

Talk to your HR Manager and/or the financial institution that manages your retirement plans and discuss which plan would be ideal for you and the steps that you should be taking year by year to ensure economic security after your retirement.

Please refer to our Tip Sheet "Investments 102: Savings Plans for Education and Retirement" for further details on retirement plans.

Online Resources

A U.S. Department of Labor site tailored specifically towards women and retirement: www.dol.gov

The Motley Fool is a good site that offers suggestions, articles, etc. about helping you with your current finances, retirement plans, and much more. Here is the link: www.fool.com

The Women's Institute for Financial Education is also a helpful site:
www.wife.org

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