For some people, the very thought of saving for retirement causes anxiety. This is because their current income may not allow for even an extra dime to be added to a savings plan. You might not have looked into all the different types of plans available because of this. There may be other saving plans that offer more flexibility and could help you reach your retirement goals depending on your situation. This article is for people who want to know the best retirement plan for them.
Define Your Retirement Goals
Before you can even begin to understand what plan is best for you, you must first establish your goals. Do you plan to move to a smaller home, maybe one of the tiny homes that are becoming more popular? Would you like to make enough money to travel the world in luxury? If you want to leave a legacy for your children, consider investing in a life insurance policy. You might want to build the extravagant home of your dreams. Perhaps your goals are more modest and you just want to save enough to comfortably live on without having to work past the age of 65.
After you set your practical targets, speak with a financial planner or any other professional who is able to analyze your circumstances and tell you how much money you need to save to accomplish your goals.
Self-Direct Your Retirement Plan
More retirement planners are choosing self-directed plans as an investing strategy. The only difference between self-directed retirement accounts and regular retirement accounts is that the people who own the former have complete control over their retirement funds and can make their own investment decisions. One advantage of these accounts is that they allow you to invest in a wide range of assets.
These are investments that are not stocks, bonds or mutual funds. People can make their retirement savings grow faster by investing in something they know well, instead of putting their money into stocks, bonds, or mutual funds.
If you want more control over your retirement plan and would like the ability to use different assets to diversify your portfolio and potentially improve your chances of building a healthy income for your future, self-directing any of the below plans may be the right choice for you.
Choose A Plan
Traditional Iras
Pre-tax savings are commonly found in these retirement plans. You can contribute up to $5,500 every year, with an additional $1,000 if you’re over 50. You pay tax when you begin taking distributions. You cannot take distributions from your account until you are 59 1/2 years old, or you will have to pay early withdrawal penalties in addition to the taxes that are due at that time. However, you are not required to take distributions until you reach the age of retirement.
Some people invest in a traditional IRA because of the valuable tax benefits it offers. Other people like that it allows them to purchase an almost-limitless number of investments, including stocks, bonds, CDs, real estate, and other things. The biggest benefit of this is that you will not have to pay taxes on the money until you retire.
If you remove money from a traditional IRA, you may have to pay taxes and additional penalties. With an IRA, you are responsible for investing the money as you see fit, whether that is in a bank, stocks, bonds, or something else. You’ll have to make investment decisions about where to put your money, even if you only consult with an adviser about it.
A traditional IRA is one of the best retirement plans around, and if you can get a 401(k) plan with a matching contribution, that would be even better. Your employer does not offer a defined contribution plan, but you can still open a traditional IRA. Traditional IRA contributions are not tax-deductible at higher income levels.
Roth Iras
Many retirement planners favor Roth IRAs. Contribution limits are the same as a traditional IRA. Employees make contributions to this account with money that has already been taxed, and the account earns interest tax-free as long as certain requirements are met. These accounts are available to anyone who has earned income, as long as their income is within the required limits. Before opening a Roth account, you should check with your CPA to see if you are eligible.
The Roth IRA has many benefits, one of which is the ability to avoid taxes on all money taken out of the account in retirement The Roth IRA provides a lot of flexibility, because you can take out contributions without taxes or penalties. The fact that Roth IRAs are flexible makes them great for retirement planning.
That means you also shoulder all of the investment risk. The downside to a Roth IRA is that, like a traditional IRA, you are in charge of the investments made and therefore also responsible for any investment risks. You will need to decide how to invest your money, or have someone else manage your investments for you. You are allowed to contribute to a Roth IRA if your income is less than a specific amount. However, there is a way to contribute even if your income is more than that amount.
A Roth IRA has huge tax advantages and is an excellent choice if you’re able to grow your earnings and keep the taxman from touching it again.
Simplified Employee Pension Plans (Sep Iras)
SEP IRAs are designed specifically for the self-employed, partners, and owners of corporations. The contribution limits for self-employed people are complicated. They are considered both an employee and an employer. It is strongly recommended that you seek professional advice when making decisions about contributions if you are self-employed.
SEP IRAs are a type of traditional IRA that is simple and cost effective for employers and employees to make contributions to. The employees own the individual IRA and can choose which institution to hold it at. Employers can deduct up to 25 percent of each employee’s pay (up to $53,000) as a tax deduction, and all employees must receive the same benefits. The owner of a distribution can take it after they turn 59. The taxes applied to the distribution will be at the regular income tax rates.
Consider a self-directed SEP IRA if:
- You are a sole proprietor, independent contractor, self-employed, partner, corporation, or S corporation.
- You do not want to be required to make contributions every year.
- You desire a plan with low administrative costs.
Pros: For employees, this is a freebie retirement account. The higher contribution limits for self-employed individuals make them much more attractive than a regular IRA.
The amount of money employees will accumulate in this plan is unsure. Also, the money is more easily accessible. Littell views this as bad.
Account holders are still responsible for making investment decisions. Resist the temptation to break open the account early. If you withdraw money from your retirement account before you are 59 1/2 years old, you will probably have to pay a 10% penalty in addition to income tax.
Savings Incentive Match Plans For Employees (Simple Iras)
This retirement plan is designed for small employers to offer to their employees. An employee is someone who receives earned income, including self-employed individuals.
This means that with a SIMPLE IRA, employees agree to have a portion of their salary withheld each pay period and deposited into the SIMPLE IRA account. This reduces the amount of taxes they have to pay. Employers contribute the salary deferral, along with a matching amount on behalf of the employee, into the account. The contributions and earnings in these plans are not taxed until the money is distributed. You can contribute up to $12,500 to your 401(k) every year, plus an extra $3,000 if you’re over the age of 50. Your employer may also match a certain percentage of your contribution.
Consider a self-directed SIMPLE IRA if:
- You have a company with less than 100 employees.
- You want plan with low start-up and administrative costs.
- You want you and your employees to have an easy way to contribute toward retirement using convenient payroll deductions.
- You need to reduce business taxes.
- You would like flexibility in how much to contribute to the employees’ plans.
Little says that most SIMPLE IRAs offer workers the opportunity to make pre-tax salary deferrals and receive a matching contribution from their employer. The employee’s perspective of this plan is similar to that of a 401(k) plan.
One downside of this employee contribution plan is that the limit for 2022 is $14,000, while other defined contribution plans have a limit of $20,500. Littell says that most people don’t contribute very much.
This means that employees will have to decide how much money to contribute to the plan and how to invest that money. Some entrepreneurs prefer the SIMPLE IRA to the SEP IRA. The key differences are that the SIMPLE IRA allows employee contributions and has lower contribution limits than the SEP IRA.
Individual 401(K) Plans
This plan allows you to share in the profits of the company while also having the option to invest in a 401(k), but it is less complicated and not as expensive as a traditional 401(k). One-person businesses that earn between $51,000 and $165,000 per year stand to gain the most potential benefits.
Companies that can offer retirement plans to their employees include corporations, partnerships, and sole proprietorships. If your business employs no one, or if you and your spouse are the only employees who make more than $100,000 a year, this might be the right plan for you. However, these plans do not have provisions for spouses who are not married.
Consider an individual(k) retirement account if:
- You are a sole proprietor with no employees other than your spouse or partner(s).
- The plan trustee and administrator of the plan is simply the business owner, their spouse or a partner. A third-party administrator is acceptable if desired.
- You desire the largest potential contribution for a business without employees.
- You want the ability to borrow from your plan.
If you are the only employee at your company, it is better to have a solo 401k rather than a SIMPLE IRA because you can contribute more money to it, says Littell. While a SEP may be simpler to establish and dissolve, if you are looking to establish your plan as a Roth, you can’t do so with a SEP. This can be done, however, with a Solo-k.
Some disadvantages to this type of retirement plan include the fact that it can be more difficult to set up and that you will have to file an annual report if the assets in the plan exceed $250,000.
This plan is not suitable for businesses that are looking to grow and take on new staff. If you hire more employees, the IRS requires that they must be part of the plan if they are eligible, and the plan will face non-discrimination tests. The solo 401(k) is a good option when compared to the popular SEP IRA.
Retirement plans for self-employed or small business owners
If you work for yourself or own a small business, you have more options for creating your own retirement plan. Three of the most popular options are a solo 401(k), a SIMPLE IRA and a SEP IRA, and these offer a number of benefits to participants:
- Higher contribution limits: Plans such as the solo 401(k) and SEP IRA give participants much higher contribution limits than a typical 401(k) plan.
- The ability to profit share: These plans may allow you to contribute to the employee limit and then add in an extra helping of profits as an employer contribution.
- Less regulation: These retirement plans typically reduce the amount of regulation required versus a standard plan, meaning it’s easier to administer them.
- Investible in higher-return assets: These plans can be invested in higher-return assets such as stocks or stock funds.
- Varied investment options: Unlike a typical company-administered retirement plan, these plans may allow you to invest in a wider array of assets.
Some key benefits of retirement plans for self-employed or small business owners are that they can provide tax breaks, help with saving money, and offer flexibility.
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