If you are reaching the age where you are starting to think about retirement, you are already probably planning on a healthy retirement, filled with all the activities that you never had time for. As this time in your life approaches, you should seriously consider what kind of life that you want to lead after you retire, think about the kinds of things you want to do and the places that you want to visit. However, it is crucial to be informed of your options and what specific questions to start asking yourself to ensure your legal rights are protected and you enjoy the life you deserve.
What is a "qualified" retirement plan?
Qualified retirement plans are generally special accounts that qualify for favorable tax treatment. Typically, it means the money you contribute to the account will not be taxed until the money is later withdrawn. So even though you "earn" money, if you place it in a qualified account, it will generally not be taxed, or will be taxed more favorably. The end result is that you earn tax-free, or nearly tax-free, money, which can add up to tremendous savings in the long term.
What are 401k plans?
401ks are the most well-known and popular qualified retirement plan. 401ks are popular with employers because the majority, or all, of the contribution comes from the employee. Traditional retirement plans are extremely expensive, so using a 401k allows an employer to still provide employees with a retirement plan at far less cost. "Matched" 401ks are retirement accounts where an employer agrees to match the employee contribution up to a set amount, for example, if the employee contributes $1,000, then the employer also contributes $1,000.
Employees like 401ks because the contribution they make from their salary is income tax free. Assuming an employee makes $50,000, if he makes $5,000 worth of contributions in a tax year to his 401k, his actual income for income tax purposes will only be $45,000. The more an employee contributes, the lower his tax bracket can be.
What are IRA retirement plans?
IRA stands for Individual Retirement Account and unlike a 401ks is not a "qualified" plan. This does not mean it doesn't have favorable tax treatment, but rather the distinction to the IRS is that 401ks are created by employers, whereas an IRA is established by an individual. There are a few different types of IRAs, which have different attributes and qualities, so investigate which type of IRA makes sense for you.
Can creditors reach my retirement accounts?
It depends on which type of retirement account you have. Many plans, including most "qualified" plans, are exempt from creditors under the Employee Retirement Income Security Act and are also protected in bankruptcy. IRAs of any variety are not necessarily protected and are not covered by ERISA. Many states, however, protect some of these plans or limit creditor's access to these plans, so check to see whether your state offers any protection.
To assess what option is best for you here are some questions to think about and then speak to an experienced elder law attorney to help you through the process.
- How long have you been saving for retirement?
- How much have you saved for retirement?
- Will you be receiving a pension? If so, how much will it be?
- What are your estimated monthly social security benefits?
- When do you plan to retire?
- Do you plan to sell your home when you retire?
- Do you have current investments in stocks, bonds, and mutual funds?
- Are you the beneficiary of any trusts?
- Do you have long-term care insurance?
Contact an Attorney
Planning for retirement can seem like a complex and daunting task. Allow an experienced attorney guide you through this important time in your life and come up with a plan that is specific to your needs and wants.