Retirement Plans

Although retirement may seem very far away for many, it’s never too soon to start thinking about what type of retirement plan you want to help your golden days be a little more golden. There are many several different types of retirement plans available. Many of them may seem similar but they all have some feature that makes them unique. We’ll go over some of the most common types of retirement plans to give you some overview of what each one is all about.

401K

A 401K is one of the best and easiest ways to have a nest egg for when you retire. A 401K is a retirement plan that you get through your employment. 401K has three distinct benefits:

  1. You get a tax-deferred growth on your savings.
  2. You get a tax deduction.
  3. You usually will get a matching contribution from your company.

One reason why experts say that 401K is one of the easiest retirement plans is because it offers the employee more flexibility with their investing options and amounts of contribution than any of the other retirement plans. Generally employers will match the contribution of their employer up to a certain amount. For instance, if an employee contributes 6% of his wages, the employer will contribute the same amount.

Participants of 401K can invest a certain amount each year and don’t pay taxes on this savings until they withdraw the money when they reach the age of 59½, which is the earliest age they can take the money out without being penalized with a fee. Through the years, the money is invested in stocks or bonds where it draws interest. In some 401K plans employees can take a loan out against their money or get a withdrawal based on hardship. Employees 50 years of age and older are entitled to a “catch up” provision where they can invest more than the yearly maximum, but up to a certain dollar amount. Employers will set up a vesting schedule, which determines how many years the employee must work for the company to retain full ownership to all the money. Most companies offer partial vesting after a few years but don’t allow an employee to be fully vested for several years, usually 7 to 10.

403B

403B plans are very similar to 401K except they are for non-profit organizations such as hospitals or organizations. The difference is that participants in a 403B cannot invest in individual stocks. The money is instead invested in either mutual funds through custodial accounts or annuities with insurance companies. 403B allows the employees that have been with the company 15 years the option to contribute an additional $3,000 for up to 5 years.

IRA

IRAs are very similar to a 401K in that your savings is tax exempt. There are two types of IRAs, traditional and Roth IRA, both which offer large tax breaks. The main difference between the two is that in traditional IRAs when you make withdrawals is the only time you pay any taxes whereas with Roth IRAs offers tax-free growth, but doesn’t permit deductible contributions. In other words, even when you make your withdrawals, you owe no tax. IRAs are also a great way to save on your income tax because of them being tax-deductible.

SIMPLE

A SIMPLE IRA plan is a retirement plan where employers set up a “simple” method to contribute to their own and their employees’ retirement accounts. With the SIMPLE IRA plan, employees can make contributions through their payroll and the employer matches the contribution. The contributions go directly into an Individual Retirement Account or Annuity. SIMPLE IRA plans can only be used by employers that have less than 100 employees that have earned over $5,000 in the previous calendar year. For purposes of the 100 employee limit, all the company’s employees are counted; even employees that are not eligible for the plan.

SEP

SEP refers to a simplified pension plan for an employee. It gives employers a simple way to make contributions towards their employees’ retirement or their own if they’re self employed. The contributions go directly to an Individual Retirement Account or Annuity.

As with all retirement plans, there are certain IRS code requirements that must be met by the employer and employee. The codes may vary from plan to plan.

To learn more about how to maximize your tax deductions with these retirement plans check out the Wealthy Tax Secrets ebook in the Blueprint to Wealth course