These days, retirement planning is something that everyone should give a thought too. Most of the times it is not easy as there are a number of things to understand, and the plan must be updated continually.

But with proper retirement planning, one can enjoy their old age without having to go through economic problems. In this article, we break down the different types of retirement plans and how to go about choosing them along.

Different types of retirement plans

Traditional IRA plans

Almost anyone can open an individual retirement account (IRA). The only eligibility criteria you need to fulfill is having a legit source of income and almost any bank will allow you to open an IRA with them. These require an annual payment of up to $6000 and individuals may also choose to contribute a certain sum as a ‘spousal contribution’. All distributions made from a traditional IRA before the age of 60 are charged with a 10% penalty fee unless the person is disabled and in certain circumstances for medical purposes. After the age of 60, all distributions from a traditional IRA will only be subjected to taxes.

Roth IRA plans

This type of retirement planning allows certain distributions to be tax-free while the contributions still remain subject to taxes. A Roth IRA has no definite amount that needs to be contributed every year and this type of retirement plan can be set up by anyone with a legitimate source of income.

SEP IRA

A Simplified Employee Pension Plan or a SEP IRA is basically a retirement plan set up by employers for the benefit of their employees and by self-employed individuals. This plan allows employers to make tax-free contributions in case of planned contributions on behalf of their employees. Anyone above the age of 21, earning at least $550 per year, and has worked for minimum 3 years with an employer is eligible to have a SEP-IRA under the employer. While the employees are necessarily having their retirement accounts set up tax-free, the distributions are not tax exempt.

529 Plan/ESA

A 529 plan is usually used by parents to set up an education fund for their children. It allows tax-exempt distributions to the child’s ‘qualified tuition programs’ upon their reaching of 18 years of age. The Education Savings Account or ESA is also an education fund but meant for higher studies such as college. It allows contributions of up to $2000 per year and works pretty much like a 529 plan.

Common mistakes to be avoided

Now that you have a basic understanding of the different retirement plans, here are some of the most common mistakes that need to be avoided.

Starting late

Most people consider having a retirement plan as one of their last fiscal goals. However, the earlier you start an IRA, the better off your sunset years will be. If you start retirement planning late, you will have to save more every year thereby facing financial crunch at an age where you can’t really take extra shifts anymore.

Inflation

If you set up an account while ignoring the inflation rate, you are bound to have a loss of the money you contributed. The trick is to beat the inflation rate by having your investments made in such a way that your return rate stays above the inflation rate.

Cashing out

In case you are planning to buy something big such as a house, before the age of retirement, make sure to have other plans from which you can take that money instead of your IRA. Cashing out on your retirement plan before actually retiring can be disastrous.

Inadequate insurance

Sure your IRA can pay for your medical needs when you are retired, but it is not a smart thing to rely on that. Always have a health insurance plan to set up to take care of your health problems, and also any other insurances required.

Not using it as a plan

Lastly, the IRA should not be treated as a bank you can dip into to make purchases. Consider your retirement plan to be your monthly income after your retirement and not something to be used for big purchases.

Retirement planning is an absolute necessity in today’s times. There are various types of retirement income planning programs that you can look into. Almost all the bank websites provide you with a full retirement age chart and an income calculator to do financial planning for retirement. So, make sure to use those properly while planning your retirement income and also to read up on every detail before establishing an IRA.