You’d rather not think about saving for retirement — it can be confusing and scary. Back when more companies offered defined benefit plans (like pensions), you didn’t have to worry about how much you were saving or what kind of account you were saving it in. But now building a comfortable retirement involves doing your homework!
We can help. Here’s a useful guide to choosing the right retirement account for your needs. We’ll define what each one does and who it benefits the most. Soon, you’ll be on your way to making the choice that helps you retire comfortably.
To start, most retirement accounts break down into two categories: employer-sponsored and individual.
Employer-Sponsored Accounts:
401(k)
Many employers offer their full-time employees a retirement count called a 401(k). This account combines a percentage of your salary with an extra contribution from the employer on a monthly basis. The money is all pre-tax, so you won’t pay any taxes until you make withdrawals in retirement. You choose how to invest the money in the account to make it grow, deciding how much risk to take and how to adjust that risk as you age. There are some limits: as of 2023, you can’t contribute more than $22,500 a year to the account ($30,000 if you’re over age 50). And you might face a penalty if you withdraw money before age 59.5.
You may have a Roth 401(k) option, which only differs from the traditional kind in that the money you contribute is taxed now, so that you don’t pay taxes when you withdraw funds in retirement. Self-employed people with no other employees may also be able to set up a solo 401(k), which lets them use their business to contribute to their retirement.
401(a), 403(b), and 457
These accounts are very similar to the 401(k), but they’re designed to serve particular industries. If you work for certain government agencies, educational institutions, or non-profit organizations, your employer may offer one of these accounts. The main difference between these accounts is whether participation is voluntary or required by the employer.
Individual Accounts:
IRA
Whether you have an employer-sponsored plan or not, it may make sense to set up an Individual Retirement Account (IRA). This kind of account is completely separate from your job, and only includes money you contribute. You can’t contribute more than $6,500 of pre-tax money annually (as of 2023), or $7,500 if you’re over 50. You choose how you want to invest the money in your account, whether it’s in stocks you pick yourself or managed funds. You need to have earned income to contribute to an IRA, and people who make over a certain amount aren’t eligible. IRAs also have an after-tax Roth option, which allows you not to pay taxes on retirement withdrawals.
SIMPLE/SEP
SIMPLE (Savings Incentive Match Plan for Employees) and SEP (Simplified Employee Pension) are hybrids: they’re individual retirement accounts that employers can contribute to. When a small business wants to offer its employees retirement benefits without setting up a full 401(k), these can be a good option. SIMPLE accounts are very similar to 401(k)s, with pre-tax contributions from both employers and employees. SEP accounts, by contrast, let employers make pre-tax contributions but not employees.
If you want to know more about your retirement options, the planning professionals at Equity Financial Services Group and Equity Trust & Wealth Management can help. Get in touch with us today and start building a retirement that works for you.