Two weeks ago, we begin discussing the importance of prioritizing our retirement plans. So let us continue this week with an introductory discussion of the different types of retirement plans.
According the Internal Revenue Service (IRS), there are seven types of retirement plans:
- SIMPLE IRA Plans
- 403 (b) Tax-Sheltered Annuity Plans
- Designated Roth Accounts
- Multiple Employer Plans
Let us begin this week’s discussion with a definition of an IRA. The Vanguard Group defines an IRA as “a personal, tax-deferred account the IRS created to give investors an easy way to save for retirement“. IRAs allows an investor to place money into an account that grows at a much faster rate than it would if the money was placed in an account that is taxable.
The benefits of investing in an IRA include: 1) benefits from tax breaks (possible tax-free withdrawals depending the type of IRA), 2) give the money an opportunity to receive annual increases from interests, dividends, and capital gains without taxation, and 3) the ability to enjoy a greater investment diversity than most 401(k) and other retirement plans offered by some employers. Similar to personal savings accounts, researching the types of IRAs are of paramount importance to determine which ones offer the best average annual return. This can be determined by finding IRA funds whose assets range from a medium to high amount as this determines the expense ratio of the fund.
What is an expense ratio? An expense ratio is the “annual fee that all funds or ETFs charge their shareholders, as well as, the percentage of assets deducted each fiscal year for fund expenses incurred by the fund“. If the expense ratio is high, then this would be a warning sign that your average annual return would be relatively lower than it would be if you invested in an IRA fund whose expense ratio is lower. Oftentimes, this information can easily be located under the fund’s prospectus on the fund’s website.
Also, as a matter of importance, The Vanguard Group also mentions that “…investment choices should be based on: 1) how many years until a person retires, and 2) how much risk the person is comfortable taking…” With these questions in mind, it will become easier to determine how much should be invested in stocks and/or bonds, depending upon the current market state. It is advised that new investors receive additional advice from investment experts to learn more about possible risks and the best possible course of action that would yield the best retirement benefits for you.
Next week, we will continue discussing the third financial goal of prioritizing our retirement accounts. In the upcoming weeks, we will continue to discuss the various ideas which could possibly assist each of us in attaining financial independence. I would appreciate any feedback from anyone as this is a community effort to living our best life in honor of the One Who has given us this life to live. Love God…love others….love yourself!
Sean Mungin, author of “The Thorn In The Flesh”