Retirement funds take many forms and depending on your current employment status, you may save for retirement in an individual retirement account (IRA) or through your company's retirement fund. However you choose to save, a retirement fund can help you to meet your future financial goals.
Function
The function of a retirement fund is to allow you to save money for your future and create a regular source of income when you choose to stop working. Retirement funds are structured so the money you invest is only available to you once you reach a certain age, allowing your contributions to grow over time.
Types
There are many types of retirement funds available. You may save for retirement through an employer-sponsored fund, such as a 401(k) or a 403(b) plan. If you're self-employed, you have the option of investing in a simplified employee pension, known as a SEP IRA, a SIMPLE IRA or Keough pension plan. Finally, you may also have the option of investing in a traditional or Roth IRA.
Eligibility
Your eligibility to contribute to a retirement fund depends on your employment status and income. To enroll in your company's 401(k) or 403(b) plan, you may need to meet certain requirements, including working a certain number of hours per week or being employed for a certain period of time. To contribute to a traditional or Roth IRA, you must have earned income. If you own your own business, the type of plan you choose to invest in may be determined by your business income and how many employees you may have, if any.
Contribution Limits
Retirement fund contribution limits are determined by the Internal Revenue Service and limits are increased periodically. Current IRA contribution limits are $5,000 for individuals under age 50 and $6,000 for those 50 and older Current 401(k) and 403(b) contribution limits are $16,500 for those under age 50 and $22,000 for those older than 50. You may contribute up to $11,500 to a SIMPLE IRA and $49,000 to a SEP IRA or Keogh plan.
Benefits
The primary benefit of investing in a retirement fund is that these types of savings vehicles typically offer you a better rate of return vs. keeping your money in a regular savings account. Many employer-sponsored funds will match a certain percentage of your regular contributions. Contributions to certain types of retirement funds, such as traditional IRAs may be tax deductible while Roth IRAs allow you to enjoy tax-free growth of your retirement account.
Considerations
When choosing a retirement fund, you should first consider what your overall financial goals are for retirement. You should base how much you save on how long you plan to work vs. how long you plan to spend in retirement and what type of lifestyle you plan to have. You should consider the tax advantages of each type of account you're eligible to contribute to and how much of your income you can afford to contribute.
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