Retirement Plan Options and Contribution Limits Simplified

Retirement Plan Options

There are plenty of retirement options out there today, but some work better than others depending on our personal situations. It can prove challenging to sift through all of them. There are also many considerations about retirement and older age that you might need to take into consideration such as will you need funding for medical procedures such as a hip replacement or will you be having to consider respite care. These could be factors that alter the way you save and fund your retirement. So how do you know which might work for you? It can be hard to tell, therefore I am going to give a few simplified options that might help you decide.

The Most Popular Options

There is a good variety of plans out there that are available for government and private sector employees. But there is some that pretty much anyone can use. So, let us start with those options. An IRA is what we are going to look at first. IRA stands for individual retirement arrangement. It is up to you what you save or invest into your IRA. You can open an IRA at most any brokerage – SoFi might be a good place to start looking, for example. Be sure to double-check any fees, and make sure they offer the types of investments that appeal to you.

In order to get some money into your IRA, you or your spouse just need to have earned some money for the tax year you put the money in for. Your child may even be able to take advantage of the IRA too, if they have earned any taxable money. If you have both a Roth and a traditional IRA and put money into each of them for the same year, you can.

A traditional IRA is an account that you contribute to pre-tax, so that you may get a taxable income tax break. But, if your partner has other retirement options at their place of work and you make over a certain number together per year, then your tax deduction for it could be zero.

Most of the time, none of the contribution or earnings are taxed until you take them out. So, keep in mind that these withdrawals will count as taxable income for the year you take them out. One of the best perks, besides the potential tax write-off, of putting your money in a traditional IRA is that you can use money to pay for qualified college expenses. The money in that account can also be used up to $10,000 towards a first home purchase.

A Roth IRA on the other hand will give you free tax withdrawals. It has plenty of similar features compared to the traditional IRA. All the income contributed comes from after-tax money, instead of pre-tax. This means that you will not get any tax write-offs for your contributions. However, it means that you will not pay any taxes on the money your withdrawal during retirement, as long as you make qualified withdrawals. Always make sure to read the fine print of the exact Roth IRA or traditional IRA you choose though. Terms can vary significantly.

W-2 Employee? Consider this

Most workplaces today are quite concerned about their employees’ well-being. They tend to offer various incentives and insurance plans with the hope to aid employee health – physical and mental – and finances as well. If you are an employee of a company that offers retirement plan options as part of your employment, then you may be able to use the types of 401k plans I am about to talk about. 401k plans are made pre-tax. If you do not make the minimum withdrawal your money by the age of 72 you will have to pay a 10% penalty. There regulations are changing consistently though so double check before you commit to a 401k plan.

Large companies or small businesses often offer one or more of these kinds of plans to their employees. Check with your benefits person to find out more or to sign up if you qualify. Benefits offered surrounding 401k plans is different for every company so triple check with them before you make a commitment to a plan that might not work for you.

Government & Non-profit employees

A 457(b) retirement plan is geared towards state and local government, as well as some non-profit groups and civil workers. Some who come under this umbrella could be fire fighters, police officers, high level executives at some non-profit hospitals and more. Double check with your HR department if think you might qualify, and you are not enrolled. A 457(b) is like a 401(k) plan in that you make pre-tax contributions. If you leave your job or retire before reaching the age of 59 and a half, you must withdraw funds from this account. But you do not get charged 10% like you do with a standard 401k.

In summary, there are plenty of retirement options to consider out there but plenty of fine print to read. So, make sure that you read all the terms for your retirement savings account sooner rather than later. The sooner you pick the right plan the more you can shield from tax and be well equipped to enjoy your retirement.

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