There are different types of retirement accounts and each has its benefits and pitfalls. Making the right decisions could have a significant impact on your tax liability and total saving when you retire. That’s why having a plan is important.
There are two basic types of retirement plans. One is a defined contribution plan. With this type of plan, you are guaranteed to be paid out all the money you contributed to the account. The value of the account when you retire is based on the amount of money you contributed, the account’s rate of returns, how long the money was invested, and your tax liability.
The other type of account is a defined benefits plan. With this type of plan, you receive recurring payments throughout your retirement. Most pensions end upon death but some have survivor benefits that will continue to be paid out to predetermined beneficiaries. The amount you receive is based on a formula when you retire.
The most common are defined contribution plans, each with its own set of rules and limitations. The two main types are IRA accounts and 401(k), each type has different variations.
- Traditional IRA.
An IRA account offers tax deductions when you contribute the money. The money in your account isn’t taxed when you contribute the money but deferred until it is distributed.
- Roth IRA.
Similar to a traditional IRA but with a Roth IRA you pay taxes when you contribute the money and don’t pay taxes when your money is distributed.
- SEP IRA.
A simplified employee pension plan (SEP) IRA is a retirement saving account established by an employer or a self-employed person. Unlike other IRA accounts, employers are allowed to contribute to them for a tax deduction. Like a traditional IRA, contributions to this account are tax-free and taxed upon distribution. SEP IRAs are intended to help small businesses provide employer-sponsored retirement plans for their employees and owners.
- Simple IRA and Simple 401(k)
These two types of retirement plans are employer-sponsored and only eligible for employers with 100 or fewer employees. Like a SEP IRA, employees can contribute to these accounts for tax deductions.
A 401(k) is a retirement plan offered by employers. You can invest a portion of your salary until you reach your maximum contributions for that year. Employers will often match a portion of your contributions. Money added to the account is not taxed until it is distributed to the account owner. Also, you usually can withdraw money from this account until you are 59.5 years old without paying a tax penalty.
- Solo 401(k)
A solo 401(k) plan is a good option for small business owners. A solo or owner-only 401(k) is very singular to a normal 401(k), except that you can usually contribute more to a solo 401(k) plan. These plans can be a great way to build excellent retirement savings but there are some limiting factors. If you have employees who are over the age of 21 and work 1,000 hours in any 12-month period, then you will likely need a company 401(k) plan. There are different types of company-sponsored 401(k) plans. Although there are limitations for the owners with these types of accounts, having a plan with Roth options and safe harbor provisions often is the best option.
Despite all the options, we can help you respond to life’s uncertainties by making wise decisions for your family and your future.
For small business owners, choosing the right type of retirement plan is even more important. Retirement planning is more complicated because you have so many options to choose from. along with all these options come potential setbacks.
Our founder, Joe Rapacki Jr., holds an elite designation from the American Institute of Certified Public Accountants. The title of Personal Financial Specialist (PFS) only goes to those with proven expertise and experience in comprehensive personal financial planning.
We can work with advisors already on your team. We can also call on top professionals with whom we’ve built strategic partnerships to serve your needs.