A retirement plan combines saving with investing to help you accumulate even more money. Ideally, you'll start a retirement plan as soon as you begin working and let it grow until you're ready to retire. If your investment strategy and market conditions pay off, you can accumulate enough money to live comfortably throughout your retirement.
Employer-Sponsored Plans
According to NPR, about half of the United States workforce participates in an employer-sponsored retirement plan. These plans deduct a percentage of your pay and place it in an account invested in stocks, bonds, trusts or other investment products. The most popular plans are called 401(k) plans, after the section of the IRS tax code that authorizes them. You put pretax money into these plans, and some employers match your contributions to a certain point, offering even greater savings and investment potential. The IRS caps the yearly amount you can funnel into your 401(k); the limit in 2010 for people under 50 is $16,500.
Individual Retirement Accounts
If you are self-employed or your employer doesn't offer a retirement savings plan, you can open an Individual Retirement Account, or IRA. According to the IRS, you fund a traditional IRA with pretax money and pay taxes when you withdraw your money in retirement. You fund a Roth IRA with after-tax money, but you don't pay taxes when you withdraw. There are limits on the amount you can put into an IRA.
Other Types of Plans
According to the IRS, other types of retirement plans include profit-sharing plans, employee stock ownership plans and money purchase plans. These employer plans sometimes allow employees to channel part of their salaries into an individual account used for investment purposes. The employer contributes a lump sum of the company's profits, shares of company stock or a percentage of the employee's pay.
Considerations
Retirement accounts usually come with strict penalties for withdrawing money before retirement---age 59.5, according to the IRS. Some accounts, such as 401(k)s, are subject to tax on the amount being withdrawn as well as a 10 percent penalty tax for early withdrawal. It is in your best interest to avoid pulling funds from your retirement account unless you meet one of the IRS exceptions, which include situations like permanent disability, death, paying certain medical expenses or being called from reserve status into active military duty.
Warning
If you invest all or part of your retirement account in the stock market, your money is subject to the market's volatility. According to Alicia Munnell of the Center for Retirement Research at Boston College, the average 401(k) balance before the financial crisis of 2008 was $78,000. After the real estate bubble burst and the market plunged, the dollar value of the average 401(k) fell to $56,000.
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