There are numerous vehicles to properly plan for retirement. The following is a discussion of some of the more popular approaches.

Roth IRA

The Roth IRA is the most tax-efficient retirement vehicle for many Americans! Roth IRAs allow individuals within certain income levels to make non-deductible contributions. Earnings are not taxed at the time of distribution as long as they are held for at least five years and you are age 59 1/2 or older when the money is withdrawn. Unlike traditional IRAs, distributions do not have to begin at age 70 1/2. If you are single or a head of household you may contribute $5,000 ($6,000 if over age 50) if your income does not exceed certain levels.

Traditional IRAs

All earnings on traditional IRAs are tax-deferred-taxes on earnings are not paid until you withdraw your money. You must begin making withdrawals from your IRA by age 70 1/2. The same contribution limitations as the Roth IRA exist.


An annuity is a contract with an insurance company. Every annuity has two basic properties: whether the payout is immediate or deferred, and whether the investment type is fixed or variable. An annuity with immediate payout begins payments to the investor immediately, whereas the deferred payout means that the investor will receive payments at a later date. An annuity with a fixed investment type offer a guaranteed return on investment by investing in government bonds and other low-risk securities, whereas a variable investment type means that the return on the annuity investment will depend on performance of the funds (called sub-accounts) where the money is invested. Based on these two properties with two possibilities each, there are four possible combinations, but the ones commonly seen in practice are an annuity with immediate payout and fixed investments (often known as a fixed annuity), and an annuity with deferred payout and variable investments (variable annuity).

Fixed Annuities

The idea of a fixed annuity is that you give a sum of money to an insurance company, and in exchange they promise to pay you a fixed monthly amount for a certain period of time, either a fixed period or for your lifetime (the concept of 'annuitization'). So essentially you are converting a lump sum into an income stream. Variable Annuities - A variable annuity is essentially an insurance contract joined at the hip with an investment product. Annuities function as tax-deferred savings vehicles with insurance-like properties; they use an insurance policy to provide the tax deferral. The insurance contract and investment product combine to offer the following features:

  • Tax deferral on earnings.
  • Ability to name beneficiaries to receive the balance remaining in the account on death.
  • Annuitization - the ability to receive payments for life based on your life expectancy.
  • The guarantees provided in the insurance component.

A variable annuity invests in stocks or bonds, has no predetermined rate of return, and offers a possibly higher rate of return when compared to a fixed annuity. The variable annuity investments grow tax-deferred. Any gains from the annuity are not taxed until money is withdrawn. The insurance portion of the annuity also may provide certain investment guarantees, such as guaranteeing that the full principal (amount originally contributed to the account) will be paid out on the death of the account holder, even if the market value was low at that time.