Introduction to Retirement Planning

401(k)

A 401(k) plan is a retirement savings plan that is available to self-employed individuals as well as small and medium sized businesses. Retirement contributions are made on a pre-tax basis, with the earnings in the account being exempt from taxation until withdrawn during retirement. These account holdings, which the employee owns, are usually made up of stocks, bonds, and mutual funds. Not only do these accounts offer potential tax advantages now, but all amounts in the retirement plan grow tax deferred until retirement. 

Roth contributions or after-tax contributions can also be made by individuals who expect their income to grow in the future years thereby enabling them to pay taxes now and not pay it later when their income is higher. 

There are many factors to consider when deciding if a 401(k) plan is right for your retirement planning needs, such as contributions limits and types of investments. The IRS updates the contribution limits each year and individuals over the age of 50 can contribute more money as catch up contributions allowing them to increase their retirement savings. 

With loan provisions in the 401K retirement plan, self-employed individuals don’t have to worry about coming up with other sources of funding when faced with unexpected life events or expenses. Moreover, the loan will charge only a minimal interest rate and repayment terms are also lenient and can be arranged on an individual basis. Depending on the type of plan selected and the loan limit specified in the written retirement plan document, employees may be able to borrow up to 50% of their vested account balance or $50,000, whichever is less.

A 401k plan allows individuals to receive distributions at or after retirement age with few restrictions. Distributions from your 401k plan are taxed as ordinary income in the year you take them, so it’s important to consider how these distributions will affect your overall financial situation before taking them out. Withdrawals before the age of 59.5 have to pay a 10% penalty for pre-mature distributions. 

 It’s important to do research and consult a financial adviser or accountant in order to make the best decision for your retirement future.

Traditional IRA

A Traditional IRA is an ideal retirement vehicle for individuals looking to save for retirement and receive tax benefits. Contribution limits to a traditional IRA are dependent on certain factors such as age, eligibility status, and income level. Individuals who earn taxable income are eligible to contribute to a Traditional IRA, depending on their filing status and income levels. Contribution amounts vary each year; individuals may be able to contribute up to the full amount with some restrictions being placed on those who meet certain criteria. Regardless of the contribution limits or restrictions imposed, a Traditional IRA is an excellent way to save for retirement while receiving regular tax deductions.

Roth IRA

A Roth IRA is a retirement savings account designed to provide tax-free income in retirement. Contribution limits to a Roth IRA are dependent on several factors, including the age of the contributor, their filing status, and taxable income. Contribution limits vary each year and increase if the individual is above the age of 50. To be eligible to contribute to a Roth IRA, taxpayers must meet certain income restrictions and not violate IRS deductions rules which could potentially limit eligibility. Contribution limits and other restrictions around eligibility should always be taken into consideration before investing in a Roth IRA.

SEP IRA

A SEP IRA is a Simplified Employee Pension Individual Retirement Account (SEP IRA). This was specifically designed to meet the needs of small business owners and self-employed individuals. Eligibility for a SEP IRA includes self-employed people, freelancers, and employers who have at least one employee with more than $600 in compensation in the current year. 

Contribution limits to a SEP IRA are generally much higher when compared to traditional and Roth IRAs. While employees cannot contribute their own funds to a SEP IRA, employers can contribute up to 25% of each employees’ annual wages into these accounts, However, this amount is restricted by IRS limits published each year. 

Additionally, while the administrative and maintenance cost for a SEP IRA is typically lower than other retirement plans, the contributions made to employees will add up as the number of employees increase.  Since this is directly based on compensation, the cost would also increase as the employee compensation increases. 

There are no reporting requirements for a SEP IRA and individuals cannot get a loan from a SEP IRA.

Defined Benefit Plan

A defined benefit pension plan is an ideal retirement saving solution for business owners, self-employed individuals, or even small and large companies and want to make large tax-deductible contributions. With this kind of plan in place, you can enjoy significant tax benefits while also providing a secure future filled with generous retirement income. Setting up such a plan is easy too with a service provider like us.

Setting up a Defined Benefit Plan isn’t difficult but it does require careful consideration as well as some documentation. First, you’ll need to decide what type of plan your company wants based on its size and budget constraints as well as its goals for providing retirement benefits for employees and the business owners. Once you’ve settled on a particular type of plan, you’ll need to draft plan documents like adoption agreements which will outline the rules of the plan. 

You’ll also need to file IRS Form 5500 each year along with producing actuarial certifications.