Retirement planning is a confusing but necessary financial step. There are many retirement account types that may be good for you, depending on a few key factors, like your employer and how you prefer to be taxed. Below, you’ll find everything you need to know about the top five types of retirement plans.
What Are the Top 5 Retirement Plans?
Some retirement plans are designed for people with full-time jobs. Some are meant exclusively for business owners. Others are adaptable to anyone, no matter their situation. Each has its own benefits and drawbacks.
Traditional IRA: Available to everyone
Roth IRA: Available to everyone
SEP-IRA: Available to self-employed people and business owners
SIMPLE IRA: Available to small business owners
401(k): Available through employers
An Individual Retirement Arrangement is a savings plan that any individual with a taxable income can open and manage themselves. An IRA offers a tax advantage because once you contribute, your money will grow and you won’t pay taxes until you withdraw it.
Different financial service companies offer different IRA plans. This makes them adaptable for anyone no matter the income, because you have the freedom to choose a plan that fits the investment options you can afford.
A Roth IRA is similar to a traditional IRA. The primary difference between them is that with a traditional IRA, you pay taxes when you withdraw your contributions. With a Roth IRA, you pay taxes on contributions as you make them, but you don’t pay when you withdraw the money upon retirement.
Also, unlike some of the alternatives, a Roth IRA will allow you to start withdrawing money early under certain circumstances.
A Simplified Employment Pension IRA is an IRA specifically designed for people who are self-employed or run their own businesses.
The SEP-IRA plan has a similar structure to a traditional IRA. The main difference is that an employer can contribute more than a traditional IRA would allow. As of 2023, the employer is allowed to contribute 25% of an employee’s income up to a maximum amount of $66,000.
Given that the contribution is dependent on income, in years when the business makes less money, you can make smaller contributions. This is beneficial if you are the employer, but less so if you are the employee.
A Savings Incentive Match Plan for Employees IRA is also intended for use by business owners, but specifically small business owners. To qualify for a SIMPLE IRA, a business must have 100 employees or fewer.
Under this plan, the employer matches up to 3% of an employee’s salary per year. If an employee leaves the company, they keep the contributions that the employer has already made.
A 401(k) is the most common retirement plan offered by employers. A 401(k) is tax-free until you are ready to withdraw the money, at which point you pay an income tax on the amount that you decide to take out. You must be at least 59 to start withdrawing funds. Withdrawal is mandatory when you turn 72 years old.
Many employers match contributions that you make into a 401(k). However, you may not be allowed to keep all of your employer’s contributions if you leave the company before you are fully vested. Some contributions will “roll over” to another company, but that scenario is dependent upon the company and specific plan.
Choosing amongst the retirement account types can be overwhelming, but it is important. If your employer offers a specific plan, that may take the choice out of your hands. If they don’t, then consider what you want out of your plan now in terms of investments and taxation, and what you expect out of it once you retire.
What is the most used retirement plan?
A 401(k) is the most common type of retirement plan offered by employers. However, an IRA is the most common retirement plan chosen by individuals or people who are self-employed.
What is the simplest retirement plan?
A traditional IRA is the most straightforward retirement plan. Anyone who earns an income can open one, so there are fewer hoops to jump through to see if you qualify.
What is better than a 401(k) for retirement?
A retirement plan is a personal choice, dependent on when you would rather be taxed and what kind of employer contributions you expect. The best plan for a business owner is not the best plan for an employee, so deciding if a 401(k) or another retirement account type is best requires research or the advice of a professional.
This article originally appeared on GOBankingRates.com: Types of Retirement Plans: How To Choose the Right One for You