The idea of saving for retirement can be a bit daunting with the medley of retirement plans out there. Here is a rundown of the best retirement plans from employer-sponsored to self-employed accounts.
The first step in finding the best retirement plan is choosing the right retirement account for you. Nowadays, having a pension is a less popular and less generous option for retirees coming out of working careers. The main area where retirement plans differ is the factor of whether or not you are coming out of a working career where you have an employer, or if you are a self-employed individual. Let’s get into the different kinds of plans that fall into these two categories.
Also known as defined contribution plans, employer-sponsored plans are offered by most employers and they include four different plans – 401(k), 403(b), 457, and TSP. As you contribute money towards one of these workplace retirement accounts, so does your employer. Here’s a brief rundown of these four types of plans and their key differences.
401(k) Plan A 401(k) is a very common type of retirement savings account that is an employer-sponsored plan where money (contributions) come directly out of your paycheck. In most circumstances, your employer matches your contributions into your account. The two types of 401(k) plans are a traditional and roth. A traditional plan is where you add money before you pay taxes, and you pay them back when you take money out. Conversely, a roth plan is set up in the fashion where you pay taxes first so you’re able to make tax-free withdrawals later. With a 401(k) plan, it can take up to five years of employment for employer matching contributions to be fully owned by you. In addition, you must take the required minimum distribution (RMD) at age 701⁄2. However, there are penalties when withdrawals are taken before full retirement age (591⁄2).
403(b), 457 and TSP Plans These three employer-sponsored plans work similarly to a 401(k) but they are distinct in their own ways. Is 403(b) plan is catered for employees of tax-exempt organizations such as public schools, hospitals, and churches. Therefore, this account is for employees of non-profit companies. Moreover, a 457 plan has two types: 457(b) and 457(f). A 457(b) is offered by state and local government employees and some non-profits, while a 457(f) is offered to highly-paid non-profit employees. The fourth kind of defined contribution plan is a thrift savings plan (TSP), and this kind of workplace retirement account is offered to federal government employees and members of the military.
Individual Retirement Accounts (IRAs)
Common retirement plans for self-employed individuals are known as individual retirement accounts (IRAs). The two kinds of IRA plans are a roth and traditional. In addition to these types, there are also spousal and self-employed (SEP) IRAs.
Roth IRA To start with, a roth IRA is funded in a way where you can make tax-free withdrawals and enjoy tax-free growth. Because of this, a roth IRA is typically recommended as an additional retirement plan to a defined contribution plan to balance the tax benefits. In fact, if you’re over 591⁄2 and have had a roth for at least five years, you receive tax-free income. Lastly, a roth IRA does not require minimum distributions.
Traditional IRA On the other hand, a traditional IRA plan mainly differs from a roth because you pay taxes on your contributions when you make withdrawals during retirement. A traditional IRA is recommended for those who are closer to retirement and there are no income restrictions so anyone can contribute to the plan.
Spousal IRAs A spousal IRA provides the option for a non-earning spouse to organize an IRA. An advantage of this plan is that the couple can expand retirement savings collectively but they must file taxes together. This kind of IRA is similar to a traditional IRA in its provisions and limitations, but there are also spousal roth IRAs that fall under the provisions of a roth IRA.
Self-employed IRAs (SEP IRAs)
If you’re a self-employed individual and/or a small business owner, a simplified employee pension (known as a SEP IRA) is a great and highly common retirement savings plan. This is a flexible, low-cost plan that allows for tax-deferred growth and it has a large contribution limit. You can choose how much you’d like to contribute per year, or even skip a year if you aren’t able to contribute.
Guaranteed Income Annuities If an employee-sponsored plan or IRA isn’t what you’re quite looking for, consider a guaranteed income annuity plan. This is where you purchase a fixed monthly payment for your retirement, and you can take the income payments as often as monthly, quarterly, or receive annual payments. When it comes to choosing the right company, it’s important to choose highly rated establishments that allow you to invest and take immediate income payments. A more flexible option is the deferred-income annuity (DIA) which allows you to decide when to start the income payments and take out the money back.