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Different Ways to Save for Retirement
by Russell Shaw
January 23, 2002
Here's a basic overview of some ways to save for retirement, along with a few pros and cons and links to more information.

Cash under the mattress. No need to explain this one, right?

  • Pro: Easy access.
  • Con: Your money doesn't have a chance to grow or beat inflation. Plus, what if there's a fire?
  • More info: 10 Principles of Investing

Savings account. Cash deposits at a savings and loan, commercial bank or credit union.

  • Pro: Easy access. Your money is federally insured. Will earn a small rate of return.
  • Con: Very low interest rate that probably won't beat inflation.
  • More info: 10 Principles of Investing

Certificate of Deposit (CD). A special type of deposit account with a bank or thrift institution. You make a deposit for a pre-set amount and period of time, and in return you get a guaranteed interest rate.

Traditional IRA. An Individual Retirement Account created by the government to help you save for retirement. You can put in up to $3,000 per year, and then invest that money in stocks, bonds, mutual funds and more.

  • Pro: The money you put in is generally tax deductible. Your investments grow tax deferred, which means your money has a chance to compound faster.
  • Con: Ten percent penalty plus taxes on money withdrawn before age 59� (with a few exceptions).
  • More info: What Is an IRA and Why Should I Invest in One?

Roth IRA. A special kind of Individual Retirement Account. Unlike a traditional IRA, Roth contributions are not tax deductible. However, your investments grow tax free.

  • Pro: Withdraw money tax free after 59� (so long as you've held the account for at least five years).
  • Con: Ten percent penalty plus taxes on money withdrawn before age 59� (with a few exceptions). Eligibility depends on income.
  • More info: What Is an IRA and Why Should I Invest in One?

401(k). A retirement plan managed by your company. Your employer withdraws money directly from your paycheck and places it in a tax-deferred retirement account. You can then allocate that money across a range of pre-selected investments.

  • Pro: Your contributions are often tax deductible. Your employer may match your contributions, up to a certain percentage.
  • Con: Ten percent penalty plus taxes on money withdrawn before age 59� (with a few exceptions).
  • More info: 401(k) Bill of Rights

403(b). Works much the same as a 401(k), but designed for employees of charitable, religious or educational institutions.

  • Pro: Money grows tax deferred and is often tax deductible.
  • Con: Ten percent penalty plus taxes on money withdrawn before age 59� (with a few exceptions).

SEP-IRA. Stands for Simplified Employee Pension Individual Retirement Account. A SEP-IRA is an alternative to a 401(k) for self-employed people and small business owners. You can contribute up to 15 percent of your yearly income, to a maximum of $24,000.

SIMPLE IRA. The Savings Incentive Match Plan for Employees, or SIMPLE, is a retirement plan for companies with 100 or fewer workers. Qualified employees can contribute up to $7,000 to a SIMPLE.

  • Pro: Your company contributes money to your SIMPLE as well. Money grows tax-deferred.
  • Con: Withdrawals during the first two years are hit with a 25 percent penalty, and a 10 percent penalty after that until age 59�.

Brokerage account. Can be used to buy stocks, bonds, mutual funds or other investments.

Social Security. A federal retirement plan that covers most wage earners in the United States. A percentage of your paycheck goes to Social Security, and your employer contributes on your behalf as well. When you retire, you can receive Social Security benefits in the form of a monthly check from the government.

  • Pro: Social Security payments are backed by the U.S. government for the foreseeable future.
  • Con: For most people, Social Security won't be enough.
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The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information should not be construed as an offer to sell or a solicitation of an offer to buy any security. The investment strategies and the securities shown may not be suitable for you. We believe the information provided is reliable, but Charles Schwab & Co., Inc. ("Schwab") and its affiliates do not guarantee its accuracy, timeliness, or completeness. Any opinions expressed herein are subject to change without notice.

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