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IRAs, 401(k)s and More: Making Sense of the Alphabet Soup of Retirement Accounts
Consumers and small business owners are fortunate to have a variety of retirement savings opportunities available to them — from IRAs and SEPs to 401(k)s and 403(b)s — that can be used to save for retirement and save on some taxes. These options are especially important now that traditional pensions and other employer-funded retirement plans have become increasingly rare. One big challenge, though, is determining which retirement savings vehicles may be right for you.
"Every day, the FDIC receives questions from individual consumers about the deposit insurance coverage of their retirement accounts but they also have important concerns about tax issues and other matters," noted Martin Becker, an FDIC Senior Deposit Insurance Specialist. "It's clear that many people would appreciate and need help understanding fundamental concepts regarding retirement plans, which could be their most important savings for their future."
While the FDIC can't advise you on where to put your money, we can help you understand the basic characteristics of different types of retirement options available from banks and other institutions so that you, perhaps in consultation with a financial or tax advisor, can make the right choices.
Here are a few issues to consider for the most common types of retirement plans that are self-directed, meaning that the consumer chooses how and where the money is deposited or invested. (Note: We use "retirement plan" to refer to one of several types of savings programs offered by a financial institution or an employer, and "retirement account" for an individual's funds within a retirement plan.)
In general there are two kinds of self-directed retirement plans: those that are tax-deferred and those that are after-tax.
Ways to Invest
Both tax-deferred and after-tax retirement plans also provide you with the opportunity to widely diversify the assets in your account. "Many financial planners suggest adding stocks and mutual funds to your retirement mix, which can provide opportunities for growth, and adding bonds to provide income. But remember, these investments can increase and decrease in value and they are not protected by FDIC insurance against loss, even if they are purchased from an insured banking institution," Troup said.
"One common strategy that financial advisors also recommend," he added, "is to invest a large percentage of your retirement funds in growth-oriented stocks and stock mutual funds early in your working years, and then start moving the funds to more conservative, income-generating investments, such as bonds, bond mutual funds, and insured bank certificates of deposit (CDs), as you get closer to retirement."
Deposit Insurance Coverage
As Becker noted, "Retirement funds that you want to be safe and secure can be placed in CDs or other interest-bearing deposit accounts at FDIC-insured institutions." The deposit insurance coverage is up to $250,000 for the combined balance of all self-directed retirement accounts owned by the same person in the same insured bank.
Here are some key points to remember: First, adding beneficiaries does not increase the maximum deposit insurance coverage of $250,000 for self-directed retirement accounts.
Also, when an IRA depositor passes away, if the account continues to be held in the name of the deceased depositor (in accordance with IRS rules), that money will continue to be separately insured from any IRA deposits at the same bank that were established by any beneficiaries. For example, if Jane Smith has an IRA naming her daughter Sally as the beneficiary, and Jane dies, that money will be insured separately from any retirement accounts that Sally has established at the same bank provided that the mother's account continues to be held as an IRA in Jane's name.
To learn more about the tax aspects of a particular retirement plan, see the Internal Revenue Service Web page "Types of Retirement Plans" at http://go.usa.gov/Xe1 or consult a tax advisor. For help or information about the FDIC insurance coverage of retirement accounts, visit www.fdic.gov/deposit/deposits or call 1-877-ASK-FDIC (1-877-275-3342) and ask to speak to a deposit insurance specialist. And for tips on saving money for retirement, read Retirement Planning and Saving: Basic Strategies for Achieving Your Goals.
Last Updated 11/28/2011