How to Choose a Retirement Plan
When it comes to retirement savings, the unfortunate truth for many is that Social Security isn’t enough or going to be enough in the future. Therefore, it is necessary in save for your future with a private retirement plan, whether it be through your employer or on your own. How do you figure out which one is right for you? Read on for a bit more clarity for your financial future.
Employer-sponsored plans
There are two types of employer-sponsored plans: defined-benefit and defined-contribution plans. The first one is rather uncommon nowadays. It is based on years of service and salary.
The second plan depends on contributions and investment performance. Therefore, this plan doesn’t have a guaranteed pension at retirement. A popular defined-contribution plan here in the United States is a 401(k). With a 401(k) plan retirement plan, the employees get to contribute a portion of their salaries pre-tax, and an employer makes a match (up to a certain percentage).
The employer’s contribution has a vesting period, often 5 years. So, after one year, only 20% is vested. This means that if an employee leaves early, some of employer’s contribution will be taken back.
Individual Retirement Accounts (IRAs)
There are two major types of IRAs that apply to individuals. One is a Traditional IRA where funds deposited into this account are tax-deductible. However, when these funds (plus capital gains) are taken out during retirement, taxes (or penalties) need to be paid.
The other type is Roth IRA. When it comes to contributing to this plan, there are no tax deductions, but also no taxes when money is taken out. As a result, many individuals prefer Roth to Traditional IRA, and even do a rollover. However, individuals with high incomes don’t qualify to contribute to Roth, or their contribution is more limited.
Contributions to both IRA accounts can be made in addition to 401(k) contributions. The annual limit is $5,500 a year, and it goes up to $6,500 for savers over 50 years old.
There are also Simple Employee Pension Individual Retirement Accounts (SEP-IRAs). These are usually offered by small businesses to their employees. Business owners can contribute, too. As much as 25% of your salary can be contributed, with current limit of $53,000 per year.
What can be invested in retirement accounts?
Most IRA investors have few restrictions when it comes to investing in stocks and bonds. There are also precious metals IRAs where investing in gold and silver is possible. But, it’s not possible to speculate with futures and options contracts or currencies.
With 401(k)s, it’s more restricted. Normally, the employer’s plan will allow for investing in only certain funds. Still, contributors should find something suitable. What’s important is to take a rather conservative than speculative approach when it comes to retirement savings.
Whichever retirement plan you choose, it’s always good advice to start as soon as possible. What better time than today to start saving for your future?