To assist you in selecting the most suitable retirement plans, the following options should be considered:
- 401(k)
- 403(b)
- 457
- IRA
- Roth IRA
- Nondeductible IRA
- Solo 401(k)
- SEP IRA
- SIMPLE IRA
- Keogh plan
We will provide information on employer-sponsored plans, individual retirement accounts, as well as plans for self-employed individuals and small business owners.
401(k) retirement plans are the most prevalent employer-sponsored plans for retirement. Employees contribute a portion of each paycheck to the account, with investment choices pre-selected by their employer. In the event of leaving a job, individuals may choose to take their 401(k) funds with them or leave them untouched.
In 2023, the maximum contribution limit to 401(k) plans is $22,500, up from $20,500 in 2022. For individuals aged 50 or older, an additional $7,500 can be contributed ($6,500 in 2022). Some employers offer matching contributions. Withdrawals from 401(k) accounts are typically subject to penalty if taken prior to age 59 1/2.
To optimize the benefits of a 401(k) plan, individuals should contribute as much as possible, carefully select investments with minimal fees, and take advantage of employer matching contributions. It is also important to be aware of the employer’s vesting schedule, which governs when matched funds become available to the employee.
Regarding tax benefits, most 401(k) plans are tax-deferred, meaning contributions reduce taxable income, while distributions are taxed. This approach is advantageous if you anticipate a lower tax bracket during retirement than at present. Roth 401(k)s are also becoming more popular. Although contributions do not reduce taxable income, distributions are tax-free. Choosing a Roth 401(k) is beneficial if you are in the same or a lower tax bracket now compared to when you retire. Employer-matched funds are still tax-deferred in Roth 401(k) plans.
Some 401(k) plans may allow individuals to take out loans against their retirement savings, with interest paid over time. Failure to pay back the full amount by the end of the loan term results in the outstanding balance being taxed by the government as a distribution.
IRA An Individual Retirement Account (IRA) is a retirement savings account that anyone can open and contribute to, provided they earn an income during the year or are married to someone who does. IRAs offer a broader range of investment options than most employer-sponsored plans, and opening an IRA with any broker can help keep fees lower than with the plans mentioned above.
To maximize the benefits of an IRA, it is important to carefully choose the broker and investments to minimize fees while keeping the portfolio diversified and aligned with your risk tolerance. It is also essential to select the appropriate type of IRA, either traditional or Roth, based on your tax situation and to contribute as much as possible annually.
Tax implications: Traditional IRAs are tax-deferred, meaning that contributions are pre-tax and reduce taxable income for the year, while distributions are taxed. In contrast, Roth IRAs use after-tax dollars, and withdrawals are tax-free in retirement.
Contribution limits: In 2023, the contribution limit for IRAs is $6,500, with an additional $1,000 catch-up contribution allowed for those aged 50 or older ($6,000 and $1,000 respectively in 2022). Individuals may contribute to both an employer-sponsored retirement plan and an IRA in the same year, and may make combined contributions to traditional and Roth accounts as long as the contribution limits are not exceeded.
Retirement plans for the self-employed and small business owners: Self-employed individuals and small business owners have access to special retirement plans that allow them to contribute more money per year, as they do not benefit from an employer-sponsored retirement plan. However, they may also contribute to an IRA, making it important to consider the contribution limits and tax implications of each plan when deciding where to allocate retirement savings.
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