Smart investing is essential for all working professionals. 401K, traditional IRA, and Roth IRA are all good for retirement savings. Here is an insight on these plans.

401K

401K is a retirement saving plan in which you can set aside certain amount towards your retirement. The amount is exempted from tax in the current year. Further, most employers do provide a match against your contribution. The amount invested in the 401K can be withdrawn in emergency situations or after the retirement age.

In 2010, the maximum limit for contributing to 401K is $16,500 for people under 50 years and $22, 500 for over 50 years. You can calculate your 401K contributions based on your individual salary and taxes. Check with your employer regarding the percentage of the match and the age before you can borrow or withdraw the amount.

Individual Retirement Account (IRA)

Individual Retirement Account (IRA) is a retirement savings plan in which you can set aside certain amount every month. But, there is no employer match provided in this account. Unlike 401K, which is only for the employee, IRA allows the savings for the entire family.  The money is deposited before tax and is taxable at the time of withdrawal.

The limit for contributing to an IRA changes with your filling status. You can plan a minimim amount in tht 401K plan and invest the remaining savings amount in the IRA. The different types of IRAs include Education IRa, Roth IRA, SEP IRA, and Simple IRA.

ROTH IRA

Roth IRA is a retirement savings plan in which you can set up certain amount which is pre-taxed at the time of deduction and not taxable at the time of withdrawal. The amount is taxed in the current year, but, is tax free at the time of distribution. You can contribute to Roth IRA throughout your life time.

You can convert your investments from 401K and traditional IRA to Roth IRA. Roth IRA are applied a tax of 6 per cent if you contribute too much. You can declare the amount in your tax forms and contribute later by the due date.

The maximum limits, conversion rules, and withdrawal or borrowing rules vary with your investment plan. Check with your financial investor before deciding.

In the United States, non-citizens can contribute to these retirement savings plans.However, they are governed by their native country rules as well as the IRS rules during withdrawal. 🙂