Which Retirement Account Is Best for You?

Before you reach retirement age, you’ll need to think about which type of retirement plan is best for you. Given today’s political and economic uncertainties, planning for your golden years can be complicated and create fears of losing your hard-earned money.

Begin by learning the differences between specific retirement plans. What are your current needs and your future goals? Getting an early start can make all the difference. For instance, if you begin diverting a piece of your paycheck now into a savings plan for retirement, you could grow your wealth and be financially secure when you’re ready to retire.

Types of Retirement Plans – Defined contribution retirement plans

A defined contribution plan gives the employee and employer a way to contribute a fixed amount of money toward the employee’s retirement. Congress passed “The Revenue Act of 1978,” which paved the way for different types of 401(k) and 403(b) plans. These two are the most popular investment plans in use today. Currently, about 84% of companies on the Fortune 500 list offer direct contribution plans rather than your average pension.

Understanding your 401(k) and 403(b) plans

The main difference between 401(k) and 403(b) plans is that 401(k) plans are for private sector employee/employer contributions and 403(b) plans are for the non-profit sector.

With a 401(k) or 403(b) plan, you have many benefits. Some of the main benefits include employer matching, certain types of tax breaks, and higher contribution limits. The current contribution limit for 2020 is $19,000, or $25,000 for employees that are 50 years old and over.

Types of Retirement Plans – The most common types of IRA accounts

IRAs are a valuable retirement plan instituted by the federal government in 1974. Congress passed the Employee Retirement Income Security Act (ERISA) to assist workers in saving for their retirement. Since not all companies offer retirement plans to their employees, IRAs allow individuals to create their own retirement plans. With all the different types of IRAs, it can seem a bit confusing.

There are several advantages to opening an IRA account. The main types of accounts (ROTH and traditional) are the most common. Both accounts allow you to take control of the types of investments you feel are best for you. You can invest in gold, stocks, art, mutual funds, and other investments. Both also offer tax-free growth on dividends or capital gains until distribution.

Traditional IRA:

Traditional IRAs allow an individual to contribute pre-tax dollars. Once you retire or reach the age of 59 ½ and older, you can begin taking withdrawals. The IRS will treat this as ordinary income. This account is best for people who believe their tax rate will be lower when they retire.

Roth IRA:

Roth IRA contributions are not tax-deductible, which means that you use after-tax dollars to fund your account. Since you paid the taxes already on your contributions, you can withdraw the funds at any time penalty-free. Not everyone can qualify to open a Roth IRA.

Retirement Accounts for the Self-Employed and Small Business Owners

What if you own your own business or you’re self-employed? It doesn’t mean you can’t have a retirement account. Here are a few options for the self-employed and small business owners.  

Solo 401(k)

Also known as the self-employed 401(k), qualifications for this type of account require that you have no full-time employment elsewhere, have no full-time employees, and that you only claim self-employment income.

SEP IRA

There are specific requirements that must be met for employees to participate, such as:

• Be at least 21 years of age and
• Employed with the company for at least 3 years

If your income is more than $285,000, you will not qualify.

Simple IRA

A savings incentive match plan is a retirement account for small businesses with less than 100 employees. Employers can offer up to 2% of the employee’s salary to be contributed to the employee’s retirement account. The employee can contribute up to $13,500 per year. Employees that are 50 years old and older may contribute up to $16,500.   

It’s best to have your financial advisor go over the details of each plan with you. If you need assistance discovering your options or you don’t yet have a financial advisor, speak with one of E1 Asset Management’s helpful agents today.