Knowing how you will support yourself financially in the long run always involves important decisions. The most common way of safeguarding your financial future is by being a part of a retirement saving plan. Here are a few things that might help you make decisions relating to this.
What is a retirement saving plan?…Quite simply, it refers to a financial plan that will provide you with funds to compensate for your loss of income once you retire. Usually, people or their employer contributes to this plan on a monthly or annual basis.
Types of retirement saving plans. When it comes to choosing a retirement saving plan, there are two basic types:
- Defined benefit plans: wherein a fixed rate is used to determine the pension each employee receives. This is based on the final salary at the time of retirement as well as other factors. No separate accounts are made for each employee, as money for this purpose is taken from a trust fund which is specifically setup for this.
- Defined contribution plans: wherein individual accounts are setup for each employee. The amount available at the time of retirement depends on the amount of money contributed as well as the gains and losses from the investments made using this money.
Are there any tax advantages?…Quite simply, yes. Employees who take a retirement saving plan are not taxed on the money deducted for this purpose. Employers who provide these plans to employees receive a tax deduction for the amount contributed. Another advantage is that the amount is allowed to grow through investments without this growth being taxed. It must be mentioned, however, that once the money is withdrawn, it may be liable to be taxed as the income for the year in which it was withdrawn.
Taking a retirement saving plan is thus a rather smart way of securing your financial future. It may be wise to check with your employer or choose a plan that suits you best.