Retirement plans might not be your priority if you are in your 20s or just starting to save. But starting early is vital to ensure a safe and secure future. Therefore, it’s important to have retirement income planning. This article will inform you of some of the best retirement plans.
Why is Choosing a Retirement Plan Essential?
According to the U.S. Government Accountability Office, in 2019, almost half of the people 55 or older had no retirement savings. If you don’t have enough retirement savings, you might depend on social security for living expenses. Moreover, you might miss out on living a comfortable life instead of a secure one when you have saved up for retirement.
Post-retirement, if you want to live a comfortable life, retirement plans assist you. These plans help you live much easier in your later years with sufficient income.
Types of Retirement Plans
Read on to learn more about the types of retirement plans. So this helps you choose the right one yourself.
When it comes to retirement, you have the following options: individual retirement, employer-sponsored plans, and plans for self-employed and business owners.
Best Employer-sponsored Retirement Plans
If your workplace offers employer-sponsored retirement plans, you must consider taking them up. The following are the best employer-sponsored retirement plans: 401(k), 403(b), 457(b), Defined Benefit Plan, and TSP (Thrift Savings Plan).
If you are working under an employer, who can offer you a match on contributions, consider opting for this retirement plan. Some benefits of a 401(k) plan include scheduling the money from your paycheck and investing automatically in the plan. You can also invest in suitable investments, for example, stocks. Additionally, you can wait to pay tax on the profits until the withdrawal of funds.
You can withdraw money in retirement tax-free in both 401(k) and 403(b) plans.
Like 401(k), you can schedule to take out the money from your paycheck automatically. Moreover, like 401(k), you can invest in various investments such as assets, including stock funds. Some employers offer a matching contribution if you save in this retirement plan. Unlike the 401(k) plans, public schools, charities, and others offer this plan.
One of the disadvantages of the 403(b) plan is that you have to pay penalties if you want to withdraw money before retirement. Also, you can’t invest in the assets you want as the plan has limited options.
For most parts, 457(b) comes with similar benefits as 401(k). But it is offered for employees of state and local governments and tax-advantaged organizations. Also, it doesn’t offer an employer’s matching contributions. This is a good plan for you if you work in the state and local government. It comes with tax advantages and allows you to access your money before retirement without penalties.
Retirement Plans for Self-employed and Small-business Owners
If you are a business owner or are self-employed, you can choose from the retirement plans such as Solo 401(k), Keogh Plan, SEP IRA, or SIMPLE IRA.
- Solo 401(k)
This plan is ideal for self-employed individuals with no employees. This retirement savings plan is best if your spouse works for your business, as they can also contribute. If you are the sole employee and employer, a solo 401(k) is a better option than a SIMPLE IRA because you can make more contributions in this plan. If you are younger than 50, you can make contributions of less than $20,500 in 2022 and $22,500 in 2023. However, if you are 50 or older, you can contribute $27,000 and $30,000, along with 100% of your earned income.
- Keogh Plan
This is a retirement plan for self-employed individuals and unincorporated businesses. Keogh’s plan is tax-deferred and can work as a defined benefit or contribution. Meaning in defined-benefit such as pensions, the employer does the funding. Whereas in defined-contribution, employees fund.
- SEP IRA
This has similar features to a traditional IRA, but it is offered to small business owners and their employees. Self-employed individuals can also contribute to SEP IRA. Unlike regular IRAs, higher contribution limits make it an ideal plan for self-employed individuals. You can contribute less than 25% of compensation or $61,000 in 2022.
- SIMPLE IRA
Simple IRA is for self-employed individuals and businesses with up to 100 employees. If you are under 50, you can make contributions of up to $14,000 in 2022 and $15,500 in 2023. If you are 50 and older, you can make an additional catch-up contribution of $3,000 in 2022 and $3,500 in 2023.
Individual Retirement Plans
Only some people can have the option of choosing an employer-sponsored retirement plan. Therefore, individual retirement accounts (IRAs) allow you to save on your own. Read on to learn more about the types of IRAs you can choose from.
- Traditional IRA
If you earn a taxable income, you can open a traditional IRA. Through savings, you invest in different assets and save tax. The fees are usually lower than in employer-sponsored accounts. As of 2022, the maximum you can contribute to a Traditional IRA is $6,000 yearly. But if you are 50 or older, you can contribute $7,000 per year.
- Roth IRA
Are you worried your income isn’t high enough to plan retirement? You don’t have to, with the option of a Roth IRA. You can take out the money before retirement without any penalties in an emergency. Like traditional IRAs, investing in different assets is in your control. It’s one of the best retirement choices as it comes with tax advantages and to grow your earnings for retirement.
- Spousal IRA
This is a great retirement plan for you if you are a non-working member of your household. Spousal IRA gives you the benefit of opening a retirement account. To clarify, it allows the spouse of a worker with an income to contribute to an IRA.
Whether you are employed or not, whether you are a government servant or a self-employed individual, there’s a retirement plan for everyone. Consider the pros and cons before opting for an insured retirement plan and choose the best option.