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One of the primary considerations in your retirement plan should be how to reduce the amount of income tax you will be subject to. The government has defined a number of retirement accounts and plans, each with their own limits and tax implications. You've probably heard of the most common ones — 401(k) or Traditional and Roth IRAs. Your employment will determine which plans are available to you, and it's important to understand they affect your bottom line.

Tax Now or Tax Later


The basic principle behind the government retirement plans is when you pay tax.

Traditional IRAs allow you to contribute pre-tax dollars. That means you get a tax deduction now on your contribution amount and defer paying tax until you withdraw the money during retirement. Many 401(k) plans also work this way.

Roth IRAs require you to contribute after-tax dollars. That means you've already paid the annual income tax on the money you contribute. The funds than grow tax-free and you don't have to pay any income tax when you withdraw the funds later in life. Roth plans are growing in popularity as people realize the bottom-line benefits over the long term for the early investor. Some companies are even offering Roth 401(k) Plans.

Stocks, Bonds & Insured Funds


Once you understand the tax implementations of your options, consider what your funds will be invested in. Most 401(k) plans offer select options of mutual funds, which are basically managed groupings of stocks and bonds. You should be able to make selections to accommodate your risk tolerance and retirement horizon. If you are managing your own portfolio of IRAs or working with a financial advisor, you can create a more custom portfolio of stocks, bonds and other investment vehicles.

If you want to eliminate all risk for ever loosing any funds, look to insured Share Certificates or annuities for all or some of your retirement portfolio. For the short-term accumulation of retirement funds, use an insured IRA Savings Account.

Funding Your 15%


Most likely your contributions won't all go to the same place. Here's one recommendation on how to prioritize where to invest the 15% of your income that will be for retirement.

1) Company Matching. If your company offers matching, max that out in what every account they offer. That's free money.

2) Fund a Roth IRA. If you're not already contributing to a Roth IRA with the company match, then set one up and max it out up to your total 15% contribution. (Make sure you are within the income limits.)

3) Go Back to the Company 401(k) or Traditional IRA. If you still haven't reached your 15%, but you've hit the Roth IRA contribution limit, increase your contribution to your company retirement fund or open a Traditional IRA.

Be sure to consult your tax advisor to insure you are following the contribution and income limits. They can change from year to year.
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