You know you should be saving for retirement. But where do you start? With so many kinds of retirement plans available to choose from, how do you know which one to use? And what’s the difference between a 401(k) and an IRA anyway? Here’s a quick guide to all your options when you’re picking which retirement products to use.
Employer-Sponsored Plans:
401(k)-
The classic employer-sponsored plan is the traditional 401(k). This account is tax-deferred, meaning that the company deposits pre-tax money monthly, usually a combination of a percentage of salary and extra matching money. You pay no taxes until you withdraw money in retirement. It’s also up to you to decide how to invest the money in the account. Keep in mind that there is a limit to the total amount you can contribute in a year — $20,500 in 2022. You may also see a Roth option, where contributions are after-tax but you pay no tax on withdrawal. Similar to the 401(k) are the 401(a), 403(b) and 457 plans, which cater to certain governmental and non-profit employers.
Pension-
These plans are not nearly as widespread as they used to be. In contrast with 401(k)s, which have defined monthly contributions, pensions are defined-benefit plans. That means you receive a guaranteed amount every month from your former employer, rather than having to worry about saving and investing money yourself over the years. The amount is usually based on how long you worked for the employer and what your income was.
SIMPLE/SEP-
SIMPLE (Savings Incentive Match Plan for Employees) and SEP (Simplified Employee Pension) are usually favored by small businesses that want to offer their employees a retirement benefit. They are technically Individual Retirement Accounts an employer can contribute to, and they have higher contribution limits than IRAs do. SIMPLE plans let employers and employees contribute pre-tax money, like with a 401(k). SEP plans, on the other hand, only accept employer contributions.
Individual Plans:
IRA-
Traditional Individual Retirement Accounts let people choose how and when to save their own money for retirement, regardless of their job. You can only contribute up to $6,000 of pre-tax money a year (as of 2022). You then decide exactly how you want to invest the money in your account. IRAs also have a Roth option, which lets you contribute money up to $6,000 a year (as of 2022) in after-tax income and then not pay taxes when you withdraw it in retirement. To qualify, you need to have earned income, but people who earn above a certain threshold aren’t eligible to contribute any more.
Annuity-
Annuities are technically a kind of insurance policy, and they can be useful as part of your retirement planning. You contribute money, either monthly or in a lump sum, and in return, you receive a regular monthly payment starting at whatever age you choose. Some potential drawbacks: annuities can have higher expenses and be more expensive to exit than other retirement products.
For more about building a secure and prosperous retirement, the planning professionals at Equity Financial Services Group and Equity Trust & Wealth Management have all the information you need. We can help you find the right products for your goals and put your plan into effect. Get in touch with us today and start creating your dream retirement.