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Example research essay topic: 401 K Plan Tax Bracket - 1,208 words

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... This is only a benefit if the money is gravely needed because the withdraw from the account will have to be paid back with interest. Other than paying back interest for borrowing you own money, there really is no other drawback's for having a 401 (k) plan. 403 (b) A 403 (b) plan is very similar to that of a 401 (k) plan except that this tax differed retirement plan is available to employees of educational institutions and certain nonprofit organizations. Before the 403 (b) was introduced, employees were given pensions that rarely matched their salary. The option to invest in a 403 (b) plan gives the employee the needed money for retirement not covered by their pension. Unlike a 401 (k) plan, participants do not have the option to invest in individual stocks.

The employees do have the option to invest into accounts with insurance companies offering annuity based contracts or going directly with a mutual fund company. As with the 401 (k) plan, withholding's are pre-taxed and earned interest is also tax differed until withdraw (retirement), when it is then taxed as regular income. Along with the 401 (k) plan, there are tax benefits due to the pre-tax contributions. Pre-tax contributions can lower a persons tax bill, increasing the value of the money put into the account. Suppose you were to invest $ 100 a month to a 403 (b) plan, you " ve reduced you Federal income taxes by roughly $ 28 (in a 28 % tax bracket). In affect, your $ 100 contribution cost you only $ 72.

As time passes the $ 28 saved earns interest and gets magnified as you approach retirement. Traditional IRA The Traditional IRA (Individual Retirement Account) is as account that provides the needed retirement savings for those people whose employers don't offer or don't offer enough of a retirement plan (401 (k), 403 (b), or pension). An IRA is a good alternative to save for retirement if you " ve already maxed out your 401 (k) or 403 (b) plans. To provide a comfortable nest egg, people are now forced to save even more for retirement. The IRA gives people the ability to fill in the gaps in their retirement portfolio. As introduced earlier, life expectancy is increasing as well as more and more people taking forced and unforced early retirements.

The IRA is key in giving these people the needed extra savings to maintain their pre-retirement life styles. The eligibility requirements of an IRA are easy to achieve. Basically, if you have receives wages, commissions, tips, professional fees, or bonuses that are reported on your taxes then you are eligible to invest in an IRA. What separates the traditional IRA from other IRA's, which will be discussed later, is that there are no yearly income requirements.

You can make as much a year a possible and still be eligible to invest in a traditional IRA. There are limits to how much a person can contribute each year. Each person can invest up to $ 3000 per year, per person in a household who is eligible; this number will increase to $ 5000 per person by the year 2007. An advantage goes to those who are married, their limit to contribute is $ 3000 per spouse totaling $ 6000 per household. Contributions to an individuals IRA are based on pre-taxed dollars which makes it a little easier to invest because you never really see the money you invest.

Full tax deductibility is an important aspect of the traditional IRA. There are disadvantages to traditional IRA's as opposed to other IRA's. Since pre-taxed dollars are invested, you will be taxed when you make withdraws. An advantage to this is you will pay taxed on your investment while in a lower tax rate while in retirement. This does not come without penalty though, the growth earned on the investment is also taxed upon withdraw which wipes out some of the benefit of compounding interest. While approaching retirement, if a person has been contributing to an IRA, they will be required to make withdraws in April after their 70 th birthday or at age 70. 5.

A person cannot make withdraws before retirement without a 10 percent early withdraw fee on top of the taxes. A person could lose up to 45 percent of their investment if they withdraw money from the account early. If the traditional IRA does not seem appealing to any individual there is alternatives with IRA's. Roth IRA The Roth IRA was created as part of the Taxpayer Relief Act of 1997 and was named after former Senator William V.

Roth, Jr. The Roth IRA holds the same idea as a traditional IRA with special rules and provisions that apply to taxes, eligibility and withdraws. In order to be eligible to contribute to a Roth IRA, your annual income must be below a certain amount depending on your marriage status. If you are single, you can contribute up to $ 3000 per year if you make under $ 110, 000 gross per year. If you are married, the total amount the household can invest is $ 6000 ($ 3000 per person) if the household makes under $ 160, 000 per year. Even though the taxes paid on a Roth IRA are non-deductible, the biggest advantage of a Roth IRA compared to a traditional IRA is the ability to have investment earnings completely escape taxation.

Since contributions are post-tax, the money is already taxed so when you reach retirement and plan on making withdraws from your account they are tax-free including the growth of the account. The power of compounding here is magnified in the end and never offset with taxes reducing your withdraws. With a Roth IRA there are more advantages to take advantage of then just the taxes. There is no required age to make withdraws from your account. If at retirement you want to exhaust your other accounts first, the Roth IRA will still accumulate interest. Making withdraws are non-reportable income and won't change your adjusted gross income which otherwise could put you into a higher tax bracket an affect other withdraws from accounts.

This leaves the Roth IRA more flexible because there will be no minimum distribution requirements, so you take out what you need and let the rest grow. After age 59. 5, even before retirement, you will be able to make withdraws before retirement if the account has been open for at least 5 years. However, the withdraw must fit the requirements of a "qualified withdraw." In order for a withdraw to be considered qualified it must be as a result of a medical emergency, loss of working ability, forced retirement, etc... The Roth IRA seems like it has no disadvantages but there are drawbacks of a Roth IRA to a traditional IRA.

One disadvantage with the taxes is that you are paying taxes now while you are likely to be in a higher tax rate then you would be when you were in retirements. The Roth IRA doesn't offer tax deductibility leaving people to pay more taxes now. Other than these drawbacks there really isn't any other reason not to invest in a Roth IRA compared to a traditional IRA


Free research essays on topics related to: tax bracket, tax rate, ira, retirement plan, 401 k plan

Research essay sample on 401 K Plan Tax Bracket

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