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You have several options to choose from as you plan for life after work. Many companies offer savings and retirement plans. The retirement income you receive from such a plan depends on how much you (and your employer) have contributed during your working years and the earnings on those contributions.
The amount you regularly contribute to one of these plans is usually taken out before you receive your paycheck, so it isn't taxed. Many companies also will make a matching contribution. For example, a company might contribute 50 cents for each dollar you contribute. The money is typically invested in preselected mutual funds. However, you can choose from among the funds, as well as what percentage of your contribution you want invested.
Money put into a mutual fund is pooled with the money of many other investors. By investing in a mutual fund, you buy units of that fund. The value of your units can rise or fall based on the type and performance of the mutual fund.
If you leave a company, you can roll over—or move—your eligible retirement funds left to another qualifying retirement account with a new company or into an Individual Retirement Account (IRA). You'll learn more about IRAs later in this lesson.
An Individual Retirement Account (IRA) is a retirement savings plan that allows you to invest money in various ways—stocks, bonds, and money market accounts are a few examples. IRA contributions are limited to $5,500 through 2013. Anyone 50 years old or older can make additional catch-up contributions of $1,000 for 2012 and beyond.
An IRA lets you invest money more freely than a 401(k), 403(b), or TSP. Instead of being limited to preselected mutual funds, you can put money in any investment you choose.
If you think an IRA may be an investment worth exploring, be aware of your options to decide which one is right for you. There are two basic kinds of IRAs:
Withdrawals from either a Roth or traditional IRA if used for a first-time home purchase up to $10,000 are not subject to the 10 percent penalty for early withdrawal.
You can generally open an IRA at a financial institution or brokerage. Expect to pay an annual fee of between $10 and $45 for handling the account. Conduct some research to find banks and brokerages that charge low rates.
If you change jobs, you can move any money in an existing 401(k) account into a rollover IRA or into your new company's 401(k). Legislation passed in 2002 also allows 401(k) funds to be rolled over into a 403(b) plan and vice versa if the specific plan allows for such rollovers.
For more information on IRAs, visit this FAQ page on Individual Retirement Accounts from the IRS.
There are many other retirement savings options available, including:
There are many more retirement savings options. Spend some time reading about different investments. When you are ready, you may want to find a financial advisor. He or she can help you navigate your way through the many investment options and get started on building your personal investment plan.
A good financial advisor can help you achieve your financial goals. If you want help selecting mutual funds, stocks and bonds, or other investment options, take time to carefully evaluate candidates. Here are some tips to start the process.
Decide if it's a good match. Does the planner understand your financial goals and respond to your concerns and questions? Does he or she listen to you and appear to respect your opinions? Does the advisor use a lot of financial jargon or offer helpful information you can understand? Do you trust and feel comfortable dealing with this person?
While the Internet is a great place to conduct investment research, it also provides a fertile ground for investments scams. Online investment scams are similar to the frauds perpetrated over the phone or through the mail. Fraudsters can spread false information using numerous Internet tools, including bulletin boards, online newsletters, spam or junk email, and chat. They can even build great-looking websites.
Investment frauds usually fit one of the following categories:
Before you respond to any online or offline investment opportunity, ask questions. Get detailed information about the company and product. Be wary of paying upfront fees or sharing any personal or financial information. To learn more about different kinds of investment scams, take a look at the Federal Trade Commission's information on Investments and Grants.
Test your scam-spotting abilities. Which one of these items represents a legitimate investment opportunity, and which is likely a scam?
If you think Item 1 is a scam, you're right. Notice that some claims send warning signs like "more return on your investment than you've ever had before", "Guaranteed profits in just 30 days", and "No risk involved".
Remember that every investment involves risk and if it sounds too good to be true, it probably is. If it's a legitimate investment, you shouldn't have to rush into "acting now". Item 2, on U.S. savings bonds, offers a legitimate investment opportunity.
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