Read these 6 Retirement Income Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Retirement tips and hundreds of other topics.
Once you set up a 401 retirement plan, prior to using it for retirement income, your options for getting at that money are limited. Generally, most plans require that you use the money only for a financial hardship. So-called "safe harbor hardship" withdrawals are limited to certain medical expenses for you, your spouse or your dependents, purchase of a primary residence, payments of certain post-secondary education expenses for the next year for you, your spouse or your dependents, or to prevent eviction from or foreclosure on your primary home.
A 401 retirement plan is a retirement savings plan that is funded by employee contributions and often matching contributions from the employer. The major attraction of these individual retirement accounts is that the contributions are taken from pre-tax salary, and the funds grow tax-free until withdrawn as retirement income. Also, to some extent the plans are self-directed, and they are portable, you can "roll over" a 401 into another retirement plan if you leave your current employer.
Retirement income or pensions for the self-employed requires a slightly different approach. A Solo 401(k) is a 401 retirement plan for the self-employed. With a Solo 401(k) you can contribute up to 100% of the first $14,000 of your 2005 compensation or self-employment income ($18,000 if you'll be 50 or older at year-end). (This figure rises in 2006 and beyond.) On top of that, you can contribute and deduct an additional amount of up to 25% of your compensation income, or 20% of your self-employment income. You must establish your plan by Dec. 31, 2005, if you want to claim a 2005 tax deduction.
Rollover IRAs (individual retirement accounts) are regular IRAs set up to serve as a receptacle for distributions from a qualified retirement savings plan or another IRA. You might use an IRA rollover if you're changing jobs and need to bring 401 retirement plan or other retirement plan assets with you. Assets you place in an IRA Rollover can continue to accumulate income tax-deferred for as long as they remain in the IRA, until they are withdrawn as retirement income.
A retirement plan can provide, in addition to retirement income, immediate tax benefits that may lower your current taxable income and help you build assets free from immediate taxation. That's because contributions made to a retirement savings plan may be tax deductible, and earnings can accumulate income tax deferred until they're withdrawn. Withdrawals of earnings are subject to ordinary income tax. In addition, a federal 10 percent penalty may apply to withdrawals taken prior to age 59½.
If the company you work for goes bankrupt, the future retirement income in your 401 retirement plan stays safe. The Employee Retirement Income Security Act (ERISA) of 1974 established guidelines for how money in 401(k) plans is maintained. To put it simply, your 401(k) plan account is not considered an asset of your employer. It is held in trust in a separate account for you. This means that your retirement savings money--both your contributions and your employer's matching funds--is not commingled with your company's money. Your company cannot access your plan money for any purpose related to maintaining its business.