You’ve probably heard about the various types of retirement plans you can use to build your nest egg. But it’s important to understand the differences between them so that you can choose the one that’s best for you. A retirement savings plan can help you accomplish your goals and stay on track. Here are six of the most common retirement accounts:
401(k) plans are a type of retirement savings plan through which employees can make tax-deferred contributions to their retirement savings.
401(k) plans are sponsored by employers and are available to most private-sector employees who work for a company that offers a 401(k) plan.
Traditional IRAs are the most common type of retirement plan. They’re easy to set up and maintain, and they allow you to reduce your taxable income by funding your IRA with pre-tax dollars. Many employers offer matching contributions or other benefit programs for employees who contribute to a traditional IRA.
Traditional IRAs can be established as traditional tax-deferred accounts or Roth accounts, depending on whether you prefer to pay taxes now or later in life. You can also convert from one type of account into another.
With a Roth IRA, you can make after-tax contributions to an account that provides tax-free growth and tax-free withdrawals. There are no required minimum distributions (RMDs) after age 70½. You can withdraw your contributions at any time for any reason without paying taxes or penalties—but if you withdraw earnings before age 59½, they’ll be subject to both income taxes and penalties unless one of the exceptions applies.
- Citations: https://www.irs.gov/retirement-plans/plan-participant—distributions#_Tax_Deductible_Roth_IRA_Contributions
SEP IRAs are for self-employed people with no employees. Because you can contribute up to 25% of your income (up to $55,000), they’re a great option if you’re able to maximize your contributions and save more than other retirement plan options.
The contribution limit for SEP IRAs is nearly identical to SIMPLE IRAs: $6,000 annually or 20% of compensation, whichever is less. Unlike with traditional 401(k)s though, there’s no requirement that workers be over 21 or in the same company since there aren’t any “employees.”
SIMPLE IRAs are great for small businesses that have employees. They’re easy to set up and manage. Plus, SIMPLE IRAs are available to self-employed individuals.
This type of retirement plan has a low contribution limit. Also, it’s subject to income limits, so some people may not be able to contribute as much or at all. But if you qualify for it and your company offers a SIMPLE IRA option through work, this is an excellent way to save for retirement on a tax-deferred basis.
A solo 401(k) can be an ideal option for business owners who have no full-time employees, but want to take advantage of the benefits of a 401(k). This plan is similar to a regular 401(k) in that it allows you to contribute pre-tax income to your retirement account.
However, unlike a regular 401(k), the contributions are made on your behalf through payroll deductions, which means you don’t have to make any contributions yourself.
If you have employees who also need their own retirement accounts, there are other options available for setting up payroll accounts with multiple accounts under one employer:
Retirement is one of the most important financial decisions you will make. It’s not just about money, it’s also about enjoying your golden years and living a good life.