Planning for the Future: What Retirement Plan is Best For You?
Just like embarking on your chosen career path is a major life milestone, the consummation of that path can be just as exciting and significant to your future. However, if you haven’t been planning for your retirement over the course of your career, you will likely be finding yourself sticking around a lot longer than you had originally pictured. Retirement accounts are an extremely valuable asset in financial planning. They exist to manage and grow your money over time so when you reach the retirement milestone, you have income to sustain you throughout your non-working years.
There are a vast array of retirement savings vehicles available to consumers. Which plan you should invest your money into depends on your unique situation and your financial end goals. The key to successful retirement plans is to consider the lifestyle you want to have, anticipate the needs of that lifestyle, and set a financial goal to achieve it.
If you are new to retirement planning, the options can be overwhelming enough to make your head spin. If you have a working knowledge of the various retirement savings vehicles but perhaps are in need of a refresher course, we can help break it all down for you. Below we will define the different types of retirement plans and discuss the advantages and disadvantages of each.
Individual Retirement Accounts (IRAs)
Individual retirement accounts allow you to save for retirement with tax advantages. The best plans for retirement for individuals consist of the traditional IRAs and Roth IRAs.
Traditional IRAs
Contributions are with either pre-taxed money that you can typically deduct on your tax return, or after-tax money
Earnings can potentially grow tax-deferred
Withdrawals are penalty-free but taxed as current income after age 59 ½
Best for those who want to take advantage of tax benefits now.
Roth IRAs
Contributions are with after-tax money
Earnings typically grow tax-free
Withdrawals are penalty-free and tax-free after 5 years and age 59 ½
Best for those who want the benefit of tax-free withdrawals later.
Employer Retirement Accounts
Employer-sponsored plans for retirement are just that: savings vehicles provided by your employer. The most popular options offered by for-profit companies are traditional 401(k)s and Roth 401(k)s (with potential employer match), with 403(b)s for nonprofits and thrift savings plans for government employees.
Traditional 401k
Grows with pre-tax money
Potential for employer match
Roth 401k
Grows with after-tax dollars
Potential for employer match
403b
Offered by nonprofit organizations
Also called a tax-sheltered annuity
Can include traditional (pre-tax) and Roth (after-tax) contribution options
Potential for employer match
Thrift savings plans
Offered to government employees
Can include traditional (pre-tax) and Roth (after-tax) contribution options
Most employers will match your contributions up to 5% of your salary
Self Employed Retirement Accounts
There are a variety of retirement plans available for self-employed individuals. The self-employed are eligible for the traditional and Roth IRAs that were previously discussed, but they also have access to several alternative savings vehicles consisting of the following: solo 401(k)s, SEP IRAs, SIMPLE IRAs, and defined benefit plans.
Solo 401k or solo Roth 501k
Contributions are pre-tax and post-tax (respectively)
Earnings grow tax-deferred and tax-free (respectively)
Best for self-employed individuals with no employees
SEP IRA
Distributions in retirement are taxed as income
Best for small businesses with few employees because whatever you contribute to your own account, you must contribute equally to your employees’ accounts
SIMPLE IRA
Distributions are taxed in retirement but contributions are deductible
Best for larger businesses with up to 100 employees because employees can contribute to their own accounts but it’s commonplace for you to offer matching or fixed contributions.
Defined Benefit Plan
Contributions are tax-deductible with distributions in retirement being taxed as income
Expensive to maintain
Best for self-employed individuals with high incomes who are motivated to make high and fixed contributions regularly
Understanding all the options available to you can be overwhelming. Let the experts at Olde Raleigh Financial help you choose the best retirement plans to get you positioned for success in reaching that milestone.
Disclosure:
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.