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What is a qualified retirement plan?

A qualified plan is simply one that is described in Section 401(a) of the Tax Code. The most common types of qualified plans are profit sharing plans (including 401(k) plans), defined benefit plans, and money purchase pension plans. In general, your contributions are not taxed until you withdraw money from the plan. Most retirement plans that you obtain through your job are qualified plans.

Can I change the beneficiary of my IRA after I start withdrawing money? 

Sure. You can always change your beneficiary. It's up to you to decide who you want to inherit your money after you die. Just be sure to complete the paperwork required by your plan administrator. You cannot change an IRA beneficiary in your will.

I’m self-employed. What kind of retirement plan can I use?

SEP. Simplified employee pensions, commonly known as SEPs or SEP-IRAs, are simple and flexible. They let you contribute up to 25% of your business income, with a cap of $50,000 (2012 plan year). You can open a SEP as late as the extended due date of your income tax return.

SEPs really are simple. You can start one at a bank, brokerage firm, or insurance company, usually for free and in the amount of time it takes to complete a simple form. You do not have to file government reports, and there are no ongoing administrative costs.

Solo 401(k). With a solo 401(k), you can contribute up to $17,000 of your employee compensation plus 20% of your net self-employment income (with a cap of $50,000 in 2012). If you are older than 50, the 2012 salary deferral limit is $22,000 and the cap is $55,500. As with a SEP, you have the option of contributing little or no money in lean years.

A solo 401(k) requires more paperwork than a SEP IRA. If your account grows to $250,000 or more, you must file a special tax return for the plan. In addition, a solo 401(k) costs more than a SEP to establish and maintain. You must establish the plan by December 31 of the year in which you want to make the contribution (and take the tax break).

Defined Benefit Plan. If you are making a lot of money and want the ability to make large contributions, consider this type of plan, which is like a traditional pension plan. The plan promises to pay you a specific dollar amount, usually each month or year, for life, starting at retirement.

The plans are not flexible; contributions are mandatory. They are also complicated and costly to set up, in part because they require an actuary to calculate your contribution amount. You’ll need help from a financial planner or pension specialist.

What’s the best way to save for retirement?

There are many ways you can save for retirement.

401(k) or 403(b). These employer-administered plans are quite common. You designate a certain amount of your salary toward your retirement, and your employer withdraws it from your paycheck. This is a great way to save -- you can't spend it and may not even notice it's gone. And many employers match some of the funds you put in.

While these plans are sponsored by the employer, they're run by investment companies or fund managers. You'll choose from various investments with varying levels of risk. There is a limit on annual contributions; in 2012, that amount is $17,000 for people under 50. If you’re older you can sock away another $5,500 in “catch-up” contributions, for a total of $22,500. These amounts change annually.

IRA. There are several types of Individual Retirement Accounts (IRAs), some of which may be sponsored by your employer. Even if not, however, you can contribute to an IRA on your own, selecting your own investments. Your annual contributions are limited to $5,000 ($6,000 if you are 50 or older); this amount changes each year. These contributions are tax-deductible if your employer (and your spouse’s, if you’re married) doesn’t offer a 401(k).

If you or your spouse is covered by a 401(k) at work, your contributions to an IRA are tax-deductible unless your income exceeds a certain amount. For 2012, the deduction starts being phased out if your income is $173,000 if married and filing jointly; there’s no deduction if your income is more than $183,000.

Roth IRA or Roth 401(k). Contributions are taxed, but withdrawals aren't. 

Why should I use a retirement account to save?

Many retirement plans offer big tax advantages.

401(k) and 403(b) plans. Income that you contribute to a 401(k) or 403(b) is not subject to income taxes. The money is taxed much later, when you withdraw it during retirement.

This means that you save more. If you put $300 into your 401(k) plan and your tax rate is 25%, your take-home pay will be reduced by only $225 (because you would have paid $75 in taxes on that $300). This allows you to save the whole $300 instead of $225.

Over your working life, that makes a big difference. If you put $225 into post-tax investments each month from age 25, with an 8% annual return, you would have around $523,000 by age 65. On the other hand, if you put $300 into your 401(k) each month with the same return, your take-home pay would be the same—but you would have over $1 million by age 65.

Roth IRAs and Roth 401(k)s.  These plans have a different tax advantage: your contributions are taxed now, but you won't be taxed when you make withdrawals. Some experts recommend Roth IRAs for younger investors, because they have longer to see their money grow. This approach also makes sense if you expect to be in a higher tax bracket when you retire.

How do I figure out how much money I’ll need for retirement?

Don't rely on the experts to tell you how much you'll need to live comfortably when you retire. Most retirement articles or website calculators say you need 70% to 80% (or even 100%) of your current income during retirement. For most people, this is a gross overestimation. Most retirees live quite comfortably on 40% to 60% of their pre-retirement income.

To arrive at a realistic number, determine how much you spend now and then subtract expenses that you will not have in retirement and add any additional expenses that retirement will bring.

1. How much do you spend now?

Determine your after-tax income from last year's federal tax return. Then subtract money you put into savings or simply gave away (to kids, or charity, or something else). Your contributions to a tax-deferred retirement plan will already have been subtracted. Your total will more or less reflect what it costs you to live now.

2. What expenses will go away when you retire?

Many of your current expenses will be gone by the time you retire-add them up. Here are some of the common costs that are often reduced, or eliminated, in retirement.

• Mortgage and house-related expenses. If you pay off the mortgage or move to a smaller house, condo, or co-op apartment (or less expensive area), you’ll pay less in property taxes, insurance, and maintenance.
• Child-related expenses. From soccer equipment to dance lessons to college, you’ll save thousands.
• Commuting. Less gas to buy, and your car will last longer too.
• Entertainment. Two words: senior discount.
• Clothing. Many people spend less on clothes after retirement.
• Income taxes. If your income drops when you retire, your tax bill should, too.
• Saving for retirement. You won’t be making those monthly contributions to your 401(k) anymore!

3. What costs will go up?

Although overall expenses may decrease, several types of expenditures are likely to increase.

Adult children. Child-related costs may continue if you have a child who needs your help.

Extensive travel. If your retirement dream is to travel extensively, your travel bill is likely to increase.

Health care. Many relatively healthy retirees cover health care costs by supplementing free Medicare with a reasonably priced "medi-gap" policy. But your out-of-pocket costs will probably go up, an if you or your spouse needs long-term care or in-home skilled nursing, your expenses will increase.