It is a known fact in the United States of America that an average American does not plan for his/her retirement – this is according to the United States of America Government Accountability Office in 2019, therefore, the need for the best retirement savings insurance plans.
So, if you are young and still building your career, it is important to have an early retirement saving insurance plans right away if you are yet to do so. This, you can do by consciously diverting a certain percentage of your income into a retirement savings plan portfolio. By this, you can safely guarantee your future.
Besides, it is easy to learn about these retirement savings insurance plans. Each plan comes with its pros and cons. Therefore, having to study them will help you identify the best retirement savings insurance plan which is suitable for you.
When Should I Start Planning For Retirement?
There is no better time than now – the earlier you begin then the more time your money has to grow. Every dollar ($) you save today will be much appreciated later on. Therefore, you need to invest wisely.
What Are The Best Retirement Plans?
401(k) Retirement Plans
This is purely a workplace retirement savings plan that you enjoy as an employee. Here, you do a voluntary contribution on your pre-tax paycheck to a retirement account. Therefore, there is a reduction in the tax paid for that year. For instance, for 2020 – you earned $50,000 and you paid $3,000 to your retirement savings account, then you will only be taxed on the remaining $47,000
However, withdrawing from the account before you are 59 and a half years will attract a 10 percent penalty and then be subjected to state and federal income tax laws. But the good thing here is that In the case of an emergency – you could still be allowed to take some 401(k) loans.
Types Of 401(k) Plan
Roth 401(k): This is a combination of both the 401(k) and the Roth IRA. It allows contribution from your after-tax paycheck and not from your pre-tax salary paycheck. Interestingly, you do not pay tax again if you remain in the same retirement plan for at least five years.
However, it does not have an income limit and the same annual contributions are maintained.
403(b) (Tax-Sheltered Annuity) Plan: This plan is offered by some churches, charities, and schools. The employee makes a pre-tax contribution to the plan – this money grows tax-free until retirement. Also, withdrawal before age 59 and a half years attracts penalties and additional tax. However, you might not have access to the funds except for qualified emergencies.
457(b) plan: This retirement saving plan is similar to the 401(k) plan. It is designed for employees of local governments, state, federal, and some other organizations that are exempted from the payment of tax. The employee contributes to the plan with a pre-tax income which only becomes taxable when the employee withdraws from the fund later on.
However, withdrawals before age 59 and a half years do not attract penalties because it is considered as a supplementary retirement savings plan. Also, the employer does not offer any matchmaking the plan unattractive.
Pros Of 401(k) plan
- It’s an easy way to save for retirement because you schedule the money to come from your paycheck.
- You enjoy a match on the contribution from your employer. This is an automatic profit you earn just by saving.
Also, you could invest the money in stocks and you will only pay tax on the profit once you withdraw from the account.
Cons Of 401(k)
- There might be some penalty if you withdraw the funds before the stipulated age
- The investment is only tied to the program offered by your employer
Individual Retirement Accounts (IRA)
The IRA retirement plan is one of the commonest plans where an individual sets up an IRA to save investments. These investments could be in the form of bonds, mutual funds, cash, stocks, or other types of investments. – Which are targeted towards the retirement years.
Besides, under the IRA arrangement, there is a limit on how much an individual can contribute yearly. Also, this contribution is dependent on the type of IRA registered for.
Types Of IRA
Traditional IRA: Here, your deductible contributions will lower your payable tax for the actual year the payment is made. However, there is a withdrawal limit once you are age 72 and also, you might be prevented from withdrawing from your contribution if you or your spouse has a retirement plan at work if you exceed the IRA limit
Roth IRA: You do not pay tax on your withdrawal at retirement and the contribution can be taken any time without a fine. However, it is only a higher tax rate at retirement that will guarantee tax savings.
Spousal IRA: An unemployed spouse can accrue tax-advantaged retirement savings but the unemployed spouse is subject to the same limits on contribution and deduction just as the working spouse.
Rollover IRA: From a 401(k) to gain more control but this will sure trigger payment of income tax on the original money contributed.
Pros Of IRA
- You gain control over your investment – you determine the bank, brokerage firm, etc
- There are broader investment options
- You decide when to get a tax break
Cons Of IRA
- A lower annual contribution limit when compared to the workplace retirement plan. $6,000 OR $7,000 (50 years and above) while $19,500 or $26,000 (50 years and above) annually for 401(k)
- Might be unable to withdraw if either of the spouses has a retirement plan at work
- Your adjusted gross income determines your contributions under the Roth IRA.
SIMPLE IRA
The Savings Incentives Match for Employees (SIMPLE) IRA plan is similar to the 401(k) plan. It allows small businesses with up to 100 employees to offer to their employees.
The contributions to this plan are from the pre-tax paycheck withdrawals and the money grows and becomes taxable when withdrawals are made at retirement. Just like the 401(k) plan, it allows for borrowing for qualified emergencies.
However, a huge penalty (about 25 percent) awaits anyone who withdraws within the first two years into the plan and before 59 and half years.
The employee’s annual contribution for using the SIMPLE IRA is fixed at $13,500 (2020 and 2021) lower than the $19,500 for other plans.
Simplified Employee Pension (SEP) IRA
This retirement plan allows self-employed individuals without employees to contribute to the SEP-IRA account. This contribution comes from your taxable income.
This plan has a higher annual contribution limit when compared to other tax-favored retirement savings plans. An annual contribution limit of $57,000 or 25 percent of income – whichever is lower (this is as of 2021).
This plan is more attractive than the regular IRA because of the higher annual contribution limits.
Solo 401(k) Plan
The Solo 401(k) plan is specially designed for a business owner with his or her spouse. Under this plan, you can both contribute as an employer and an employee.
As an employer – you can contribute up to 25 percent of your income while as an employee, you can contribute up to $19,500 annually (or $26,000 annually if you are age 50 and above)
However, both contributions as an employer and employee should not be more than $57,000 (as of 2020) and $58,000 (2021). Then $63,500 (as of 2020 if you are 50 and above) and $64,500 (2021 if you are 50 and above).
Therefore, contributions can be from your tax or the business – depending on whether you are contributing as an employer or an employee.
Final Thoughts
Either with or without an employer – you can set up a retirement savings plan for yourself, as long as you earn an income. Determine the type of account suitable for you if you are not under an employer – for example, IRA if you don’t have a business.
Then check out from a financial institution if they offer what you are looking for. So, get yourself ready for retirement today.
