Top 5 Retirement Investment Options

Retirement planning affects practically everyone and yet it is estimated that 70% of people do not have an adequate retirement investment plan in place. Part of the reason is that trying to understand the retirement plan options available can be daunting. All have tax consequences, some favorable and some not. Here are the top five retirement investment options available in the United States.

1. 401(k)

401(k)s are a cornerstone of a retirement plan for employees. The plan allows employees to contribute a portion of their income to the plan before taxes- meaning that the contributions are tax-deferred until withdrawal. In some plans, the employer also has a matching component, meaning that they chip in a percentage based on how much the employee contributes. This is basically free money to the employee and, even if you don't have enough money to max out your 401(k) contributions, at least contribute enough to get the maximum employer matching.

2. Traditional IRA

A traditional IRA works much like a 401(k). Contributions to the plan (which are capped yearly) are tax-deductible but are taxable when withdrawn. The income in the IRA plan accumulates on a tax-deferred basis so you don't pay any tax on it until you withdraw it in retirement. The total allowable contribution (in 2010) for a traditional IRA is $5,000 ($6,000 if you're over 50). At age 70, you must begin withdrawing a portion of the plan.

3. Roth IRA

A Roth IRA allows you to contribute after-tax funds into the plan, which currently has the same maximum limits as a traditional IRA. These plans have more flexibility than a traditional IRA by not requiring partial redemption by age 70.

4. Reverse Mortgage

There are several retirement plan options outside of the traditional. One of the most popular is the reverse mortgage. A reverse mortgage allows a retired homeowner to borrow some of the equity out of their home while still living in it. No repayments of the loans are required until the death of the taxpayer or the sale of the house. Reverse mortgages do not require an adequate income level as do home equity loans and are easier to qualify for.

5. Variable Annuities

Once all of the tax-advantaged retirement savings options have been maxed out, variable annuities are a popular way to save. These plans have both a savings component and an insurance component. The savings side consists mostly of a selection of mutual funds into which you can allocate your contributions. The insurance tops up the plan if, when you die, the total accumulated contributions are higher than the market value of the plan. This would occur when investment markets have been depressed. A good choice for excess retirement savings contributions.