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Eight Must Know Terms for Retirement

Published on June 21, 2016

Does financial jargon give you a headache? Do the terms associated with retirement plans sound like a bunch of mumbo-jumbo? Relax … here’s a quick primer on retirement plan terms that you need to know, especially if you are a younger worker about to start funding your plan. (If so, good for you!)

1. Defined Benefit Plan

This is an employer-sponsored retirement plan in which your company would pay a regular (“defined”) benefit to you after you retire—either a specified monthly dollar amount or a figure based on a calculation (factors include your earnings history and years of service at the company). The defined benefit plan may require you to contribute to it or not. Pension plans are defined benefit plans but they are starting to disappear from the employee benefits landscape.

2. Defined Contribution Plan

The word “contribution” signals that the employee contributes funds into this employer-sponsored retirement plan; the employer may also make contributions on your behalf. The employer will offer you some options for how you’d like to invest the money. Your retirement savings amount is predicated upon your contribution level and the kinds of returns the investments yield.

3. 401(k)

Among defined contribution plans, one of the most popular is a 401(k). Your company may offer you two varieties to pick from:

A traditional 401(k) – you contribute pretax dollars from your paycheck. The pretax contributions help lower your taxable income, and any earnings in your account are tax-deferred (funds grow tax free until withdrawal).

A Roth 401(k) – you can contribute on an after-tax basis. You pay taxes up front on your contributions but the money or any earnings you withdraw in retirement are tax-free income.

There are contribution limits for the 401(k) plans. For 2016, employees under 50 years old can contribute up to $18,000, (regardless of the type of plan you have). Employees 50 years old and up can also make additional catch-up contributions of up to $6,000, for a maximum contribution of $24,000.

Universities, the government and nonprofit organizations have a different version of these plans, the 403(b) or 457 plan.

4. Match

This refers to matching contributions your employer may opt to make to your account. This can really help boost your retirement savings. Matching contributions often occur with 401(k) plans, as a certain percentage of your contribution, up to a certain amount of your salary.

5. IRA

IRA stands for Individual Retirement Arrangement or Individual Retirement Account. You open and fund this on your own. You may choose to open a Traditional or a Roth IRA.

IRAs have much lower contribution limits than 401(k) plan: up to $5,500 in 2016, with the catchup contribution of $1,000 allowed for individuals who are 50 and older.

6. Target Date Fund

There is a type of mutual fund called a target date fund; the types of investments this fund includes will change over time, as you near the target date. In other words, the investing strategy of a target date fund (also known as an age-based fund or lifecycle fund) is matched to a specific timeframe (hence, target date). Target date funds of younger workers will likely include riskier investments; funds of older workers nearing retirement age will shift allocations to more conservative, low-risk investments.

7. Rollover

We’ve written about rollovers before and even have a video that explains rollovers and transfers, which are different ways to fund a new 401(k) or IRA. With a rollover, you roll funds over from an existing retirement plan to a new plan of the same type. It might be after you leave one job that had a 401(k); if your new company offers a 401(k), you can roll the funds over from the old to the new. It’s an easy way to keep all your retirement savings in one place.

8. Self-Direction

Now this a term that we like to hear at Next Generation Trust Services! Self-direction is a great way to build retirement savings for certain savvy investors who like to take charge of their investments and are comfortable making their own investment decisions. People who self-direct their retirement plans can include a broad range of alternative assets in their plans that are not allowed in typical IRAs or 401(k) plans. For example, a self-directed retirement plan can include precious metals, commodities, real estate, secured or unsecured loans, and many other non-publicly traded assets. For example, do you already invest in rental property? Include it in a self-directed IRA. Want to purchase shares in a rubber tree plantation? Have your self-directed retirement plan make the investment.

Self-directed investors work with administrators (like Next Generation) who manage all the paperwork and mandatory reporting, execute the transactions (upon instructions from the client), and provide transaction support. It’s up to the individual to fully research and understand the target investment—as administrators, we do not offer investment advice. However, we do offer education about self-direction as a retirement strategy, and review all transactions to ensure our clients are investing according to IRS guidelines.

Want to know more about self-directed IRAs or 401(k) plans? You can download this informative white paper to read more; then contact us at Info@NextGenerationTrust.com or 888.857.8058 with any questions or to open your new self-directed retirement account.

self directed IRA

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