In a nutshell, retirement plans offer tax benefits, but each retirement plan has its own set of benefits, withdrawal restrictions, and contribution caps. Some are made for employees, others are for business owners and some are just for available for anyone. Here’s a rundown of the six most prevalent retirement plan options to help you make an informed decision:
Some plans provide tax breaks when you make contributions, while others do so when you cash out. One key aspect is maximum yearly contributions, or the most money you can put away in a savings account. Another is withdrawal rules, when money can be taken out of the plan without a hit to your account, and what happens if you don’t follow the rules.
The large contribution limits and ease of use of 401(k) plans are two of their most attractive features for both employees and employers. However, keep in mind that 401(k)s have fewer investment alternatives and it could be years before you actually own all of your employer’s matching contributions.
Traditional IRAs have the benefit of being open to anybody, with a wide variety of plan and investment options, but they also have relatively modest contribution limitations. The Roth IRA, on the other hand, offers greater leeway in terms of retirement savings contribution and withdrawal timing, which could result in a lower effective tax rate.
SEP IRAs are designed for small businesses, their owners, and self-employed workers, and they provide generous contribution caps and quick vesting for employees. The Simple IRA has smaller contribution limits than SEP IRAs and 401(k) plans, but it is straightforward to set up and offers either matched or guaranteed contributions for employees.
If you own a business in which you are the only employee, you may be eligible for a Solo 401(k), which is a retirement plan designed specifically for business owners who do not have any other employees. Depending on the plan, you may be able to contribute more than with other individual retirement plans and may even be able to make contributions in the form of either traditional pre-tax dollars or Roth (after-tax) dollars.
Keep in mind, As an incentive to save for retirement, tax breaks are offered by most retirement plans. Income tax brackets, maximum annual contributions, and distribution requirements all vary among the various retirement plan options. Plans range from those exclusive to employees to those open to sole entrepreneurs and business owners to those available to the general public. However, because to the numerous factors involved, not everyone will qualify for the tax benefits offered by these plans. For more information, it is best to speak with a qualified tax expert.