Just as you work today, you will have to retire someday. Retirement can be great only if you have money. Otherwise, it's a nightmare. This makes Retirement Planning very important. Finance Minister Arun Jaitley will present the Union Budget 2018-19 on February 1st 2018.
There are chances that the Modi Government will introduce retirement plans which have tax advantages and encourage you and other citizens to save and invest for retirement. You and other citizens invest for retirement in PPF, NPS, EPF and even ELSS. There is a desperate need to introduce retirement plans which have good tax benefits.
Let's take a look at some of the retirement plans from around the World, and how they help save tax.
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Developed Countries like the US, UK and Australia have excellent social security plans. Let's get an idea on how these social security plans help their citizens save for retirement.
The 401(k) plan is the most popular employer-sponsored retirement plan in the USA. The 401(k) plan gives tax deductions to both your employer and you (employee), if a contribution is made by your employer, into your 401(k) retirement account.
If you earn money, you pay a certain amount of income tax to the Government. The 401(k) plan helps you avoid paying this income tax in the current year, up to a certain legal allowable limit. For 2017, the maximum allowable limit was $18,000 for an investment in the 401(k).
The amount you invest in the 401(k) plan is called the salary deferral contribution. This is because you have chosen to defer (postpone) a part of the salary you earn today, into the 401(k) plan. This money that you save can be spent in retirement years.
The money you invest in the 401(k) grows and the investments you make, earn investment income. Your money grows tax-deferred, as you don't pay any tax on the investment gains each year. When you retire, you pay tax on the amount withdrawn at that time. You have to pay a 10% penalty for pre-mature withdrawal. (This is a withdrawal before 55 or 59 years).
If you invest in the Roth 401(k) plan the contributions are made after-tax. Both the contributions and the earnings from these contributions are tax-free at withdrawal.
A citizen makes a certain number of contributions to the UK Government in exchange for benefits. These benefits can be insurance against sickness, unemployment and also life and retirement pension. If you are employed and earn at least £157 a week, you have to contribute to the National Insurance. This is £8,164 for 2017-18. If your earnings are below this threshold, you do not have to make any contributions towards national Insurance.
If you earn more than £8,164 a year up to £45,000 a year, you have to pay 12% of your earnings towards National Insurance. If you earn more than to £45,000 a year, you have to pay 2% of your earnings towards National Insurance.
Your employer will contribute this amount directly from your payslip towards National Insurance under Class 1 National Insurance Contributions.
See Also: Financial Plans For Retirement Benefits
Your employer deducts tax before paying your salary. Your employer knows how much tax to cut from your salary through PAYE (Pay As You Earn). If you have paid too much tax, you get a refund. Too little and you have to pay extra tax.
Your contributions towards Class 1 National Insurance, stop at the age you start receiving State Pension. Your contributions are tax-free, but withdrawals are taxed at retirement.
If you contribute to the NPS, EPF or PPF, you get a tax deduction under Section 80C, up to Rs 1.5 Lakhs a year as a combined deduction. You get an additional deduction up to Rs 50,000 a year for NPS contributions under Section 80CCD(1b). EPF and PPF enjoy EEE benefit where interest/returns are tax-free. Withdrawals are tax-free. Be Wise, Get Rich.
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