As you journey through life, it’s never too early to start planning for retirement. Understanding the array of retirement accounts available can be vital to creating a secure financial future. Additionally, you can use a retirement calculator to figure out how much money you may need in your retirement. Let’s explore several types of retirement accounts that can play a pivotal role in your planning strategy.
401(k) and Other Employer-Sponsored Plans
A 401(k) plan is one of the most common employer-sponsored retirement plans that allows employees to contribute a portion of their salary to a tax-advantaged investment account. Your employer may also match a percentage of the contributions you make, providing an additional boost to your savings.
The IRS has set an annual maximum contribution limit of $23,000 for 401(k) plans in 2024. That limit also applies to 403(b) and 457(b) plans offered to public school employees, colleges, non-profits, churches, and government employees. Each employer-sponsored account has traditional (tax-deferred) and Roth (after-tax) versions available.
Individual retirement accounts (IRAs) are self-managed retirement savings accounts available to anyone, regardless of employment status. One type of IRA is a traditional IRA, which offers a tax-advantaged way to save for retirement. Contributions are tax-deductible, providing an immediate tax benefit. Additionally, the investments in the account grow tax-deferred until you make withdrawals during your retirement. The IRS has set the 2024 maximum contribution limit at $7,000, or $8,000 if you’re 50 or older. Understanding the contribution limits and tax implications is crucial when considering a traditional IRA.
Roth IRAs differ from traditional IRAs in their tax treatment. Contributions to Roth IRAs are made with after-tax dollars, meaning there’s no immediate tax deduction. However, qualified withdrawals, including earnings, are tax-free in retirement. Roth IRAs offer flexibility, allowing you to withdraw your contributions (but not earnings) penalty-free at any time, making them an attractive option for many savers. Like a traditional IRA, the IRS contribution limit on a Roth IRA is $7,000 for those under 50 and $8,000 for those 50 and over.
SIMPLE and SEP IRAs
SIMPLE and SEP IRAs are variations of a standard IRA. The Savings Incentive Match Plan for Employees (SIMPLE) IRA allows small business employees to have retirement funds deducted from their paychecks and deposited into a tax-deferred savings account. The employer must match up to a certain amount of those contributions.
A Simplified Employee Pension (SEP) IRA is an account for small businesses to contribute a certain amount of the employee’s pay into a tax-deferred IRA. Employees can’t make additional contributions, but they are 100% vested when the account is opened. Like the traditional IRA, funds are taxed when disbursed in retirement.
Solo 401(k) Plans
A Solo 401(k) is a 401(k) retirement plan for the self-employed. It works like a traditional 401(k) with limited investment options and gives the account holder a high contribution limit. Self-employed individuals can contribute up to $69,000 in 2024, or $76,500 if they’re over 50. Solo 401(k)s are available in traditional or Roth forms, giving you some flexibility on your tax liabilities. But these accounts can be complex, so make sure to do your research before opening one.
Start Planning for Your Retirement
In crafting your retirement strategy, it’s essential to weigh the advantages, limitations, and tax implications of each account type. Depending on your employment situation, income level, and financial goals, a combination of these accounts may offer the most comprehensive approach to securing your retirement. Regularly revisit and adjust your strategy as your circumstances evolve, and consider seeking professional advice to optimize your retirement accounts for a financially resilient future.