Investment & Retirement Savings - Maryland Auto Insurance

How can you invest in your financial future and what are the options?

Taking the reins to your financial future can seem daunting. There are many options out there, and if you don’t know what it all means you might be left scratching your head.

Retirement plans, IRAs, savings bonds, and stocks all provide ways for you to invest your money and plan for the future. These options are designed to help you to plan for life events and be ready for unplanned or emergency needs. Learning about the differences and what they all provide is key in helping you set yourself and your family up for financial security in the future.

Retirement Plans

IRAs

Savings Bonds

Stocks

Retirement Plans

Retirement plans generally fall into two categories: defined benefit plans and defined contribution plans.

According to the U.S. Department of Labor:

A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service – for example, 1 percent of the average salary for the last 5 years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee’s individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee’s behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.

Learn more about these types of retirement plans:

Choosing Between a Defined Benefit and Defined Contribution Retirement Plan (Forbes.com)

Types of Retirement Plans (IRS.gov)

Tax Information for Retirement Plans (IRS.gov)

Best Retirement Plans: Choose the Right Account for You (NerdWallet.com)

IRAs

Individual Retirement Accounts (IRA) provide tax advantages for your retirement savings. You can contribute each year, but there is an annual maximum amount that is allowed by the Internal Revenue Service.

There are a few types of IRAs available, including:

Traditional IRA’s are tax-deductible. You do not have to pay taxes on these earnings until retirement.

Roth IRA contributions are made with after-tax funds. They are not tax-deductible but earnings and withdrawals are tax-free.

SEP IRA’s allow an employer or self-employed individual to make retirement plan contributions into a traditional IRA established in the employee’s name.

A SIMPLE IRA stands for Savings Incentive Match Plan for Employees. This is something that is available to small businesses that don’t have any other retirement savings plan. This is similar to a 401(k) plan, but with less costly administration and lower contribution limits.

Savings Bonds

Savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.

Savings bonds are exempt from taxation by any State or political subdivision of a State, except for estate or inheritance taxes. Interest earnings may be excluded from Federal income tax when used to finance education (find more information on specific tax considerations here).

Series EE U.S. Savings Bonds

Series I U.S. Savings Bonds

Learn more about buying electronic savings bonds at TreasuryDirect.gov

Stocks

Stocks are a type of investment that represents a share of ownership in a company. Investors buy stocks that they think will increase in value. Stocks also are called “equities.”

Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul. However, you can also lose the money that you’ve invested in stocks. There’s no guarantee that the company whose stock you hold will do well.

Before you begin building an investment portfolio, make sure you have all the necessary information. Here are some resources to help:

Introduction to Investing (U.S. Securities and Exchange Commission)

Investing Basics – Stocks (U.S. Securities and Exchange Commission)

Saving and Investment Options (USA.gov)

Save and Invest (MyMoney.gov)

How to Invest in Stocks (NerdWallet.com)

Other Investing and Retirement Resources

www.investor.gov

www.mymoney.gov

www.sec.gov