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Understanding Retirement Income Plans

By Cathy DeWitt Dunn

Understanding retirement income plans requires a basic education on the common sources for retirement income. Typical retirement income sources include:

  • Pensions,
  • Annuities,
  • IRAs,
  • Social Security, and
  • Investment accounts.

Many employers have phased out traditional pension plans that pay either a lump sum or a guaranteed monthly amount upon retirement. Instead, companies are sponsoring less expensive 401(k) plans. If your company has a 401(k) plan, it is wise to contribute as much as possible. You can take advantage of employer matching while you are employed. In addition to company matching, there is a tax deduction on all of the money you contribute to your 401(k). When you retire, you are able to roll the money in your 401(k) into an IRA account or annuity. Some companies allow you to do this after age 59 ½ – even if you are still employed.

IRA Retirement Plans

Understanding retirement income plans

There are two basic types of IRA plans, Traditional IRAs and Roth IRAs. Both types are subject to annual contribution limits.  The money you contribute to a Traditional IRA is tax-deductible. The money is taxed as regular income once you start withdrawing money from the Traditional IRA.

However, money you contribute to a Roth IRA is not tax-deductible. Instead you pay taxes as you contribute. This means that the money you withdraw from your Roth IRA in retirement comes to you tax free. It is important to note that any distributions taken from IRA plans prior to age 59 ½ are subject to an IRS penalty. This penalty does not apply to rollovers or transfers to another IRA.

Successful retirement savers often take advantage of tax-deferred, or non-qualified, annuity plans. These plans are funded with after-tax money and do not have contribution limits. All of the money in a non-qualified annuity grows tax-deferred. Then, when you begin to draw income in retirement, you pay income taxes only on the gains you withdraw. Your principal is post-tax money and is not taxed upon withdrawal. Non-qualified annuities are considered retirement vehicles because of their tax-deferred status. As a result, they are subject to the IRS early withdrawal penalty before age 59 ½.

FREE Income Plan Analysis

Monthly Income from Social Security

Social Security pays monthly income for life from the Federal Government. The amount you receive is based on your previous contributions and the number of years you worked. Financial experts often caution against relying on Social Security. Social Security can be eliminated or modified by congressional legislation at any time.

Monthly Income from Annuities

In contrast, annuity income is contractually guaranteed by the issuing company. Companies are required to maintain adequate assets and reserves to meet all of their obligations. They are also backed by re-insurance and state level guarantee funds.

Annuity plans can be structured both as non-qualified, or as qualified plans. Many people choose to rollover 401(k) plans or brokerage account IRAs into IRA annuities for retirement income. There are many different types of annuities. They vary in the degree of protection they offer and in earning potential. Annuity plans also offer a variety of income options including:

  • Monthly income for life,
  • Income for a set period of time, or
  • Lump sum options.

Don’t get frustrated or overwhelmed. An Annuity Expert can help you choose the best plan for your retirement needs.

Fixed Index Annuities and Retirement Planning

We specialize in Fixed Index Annuities. These plans offer 100% principal protection. They also can also earn gains based on the performance of market indexes like the S&P 500. FIAs can provide growth that helps keep up with inflation. You can still take advantage of positive growth in the financial markets. However, when the markets perform poorly, a Fixed Index Annuity will not lose money.

Retirement income comes from a variety of sources. Understanding retirement income plans can seem daunting at first, but we hope this article has helped. If you have further questions, our experts are available to discuss your options. Call (972) 473-4700 to schedule your complimentary consultation today.


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