WHAT IS A RETIREMENT PLAN?
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When we talk about "retirement planning," we don't mean daydreaming about all that leisure time. A retirement plan is an investment instrument that helps you accumulate money that can provide you an income in retirement. Most retirement plans are authorized by the Internal Revenue Code. For example, 401(k) plans, Keoghs, individual retirement accounts (IRAs), and other plans enable you, your employer, or both, to contribute to various investments for your retirement.
Although many types of plans exist—each with its own special features, advantages and disadvantages—these plans share a number of common attributes.
For instance, most retirement plans offer tax-deferred earnings. You do not pay taxes on the earnings until you withdraw funds from your account.
Many plans also enable you to contribute pre-tax dollars to these investments. This enables you to lower your current income for tax purposes and defer taxes until you withdraw funds when you retire and may be in a lower tax bracket.
Yet because of the variety of plans—and the variety of reasons for withdrawing money from them—people sometimes have questions about when, how, and how much they can take from their plans. This tutorial will address a number of the most frequently asked questions about withdrawing money from retirement plans.
Taxes are a formidable issue in retirement plan withdrawals, or "distributions." We'll begin to examine this issue in the next article.