There are many different ways that you can save for retirement. There’s always the old-fashioned way of hiding money in your mattress, but there are probably some better ways to save for retirement that will also save you on your income taxes as well. In this article, I’ll try to briefly explain some of your options and their advantages and disadvantages. These options will vary depending on whether you are just saving for yourself individually or if you are a business owner and want to set something up for the employees of your business.
With the exception of Roth IRAs, all the retirement plans listed here are deductible from your taxable income or are not included in the income of your employees if you are making a contribution to their accounts. The earnings in all of these plans will grow tax free, so that you are not taxed on the contributions or earnings until you decide to take your money out of the plan. These are considered “qualified” retirement plans, which means there are very specific IRS qualifications you must meet in order to receive these tax advantages.
Types of Retirement Plans for Individuals
The best and most convenient way for individuals to save for retirement is usually to participate in a retirement plan sponsored by their employer. If your employer does not have a retirement plan, or if you want to save some money for retirement in addition to what is in your employer’s plan, following are some of your options:
IRA (Individual Retirement Account)– This is the most typical way to save for retirement, and probably the easiest. Most banks or investment brokerages will allow you to open an IRA account, where you then decide where the money will be invested.
- Traditional IRA – Contributions are deductible from your taxable income and are limited to $3,000. You will be taxed on the money when you withdraw it.
- Roth IRA – Contributions are also limited to $3,000. The contributions are not deductible but the earnings still grow tax-free. Because there is no deduction for your contributions, when you withdraw your contributions, they will not be taxed.
Keogh – This is a retirement account for self-employed individuals. You can choose to setup any of the plans that are available for businesses to setup.
Types of Retirement Plans for Businesses
In order to retain good employees, it is important that you treat your employees well. That includes offering them adequate benefits. Following is a listing of some of the different types of retirement plans you can setup for your business:
SIMPLE-IRA – This allows employees to contribute, similar to a 401k plan. The employer matches the employee contributions dollar for dollar, up to 3% of their compensation. The contribution amounts allowed are much lower than a 401k, but it is very “simple” to administer.
SEP-IRA (Simplified Employee Pension)– This is very similar to a SIMPLE plan, except that only the employer makes contributions. The contributions can be from 0 to 15% of all eligible employees’ wages.
Defined Contribution – The employer determines a set formula to calculate how much will be contributed every year, such as 15% of eligible employee’s wages. These plans are very flexible and can have a wide range of options that can be included such as allowing loans to participants, or assigning a “vesting” schedule to contributions, so that employees have to be employed a certain number of years to receive their full account balance if they leave.
- Profit Sharing – The employer decides each year how much (if any) they want to put into the plan.
- Money Purchase – The employer sets a percentage that is going to be contributed each year, and is required to make this contribution, whether or not the company has profits.
- 401k (403b for employees of nonprofit organizations or 457 for employees of governments)– Employees are allowed to contribute money into the plan, and the employer can also decide to match these contributions. This is frequently combined with a profit sharing plan.
- ESOP (Employee Stock Ownership Plan) – Under these plans, a portion of the contribution is invested in the stock of the employer.
Defined Benefit – These are sometimes referred to as traditional pension plans. Rather than determining a set percentage or amount that will be contributed each year, a formula determines how much each employee will receive upon retirement (ie 100% of their average wages earned during a three year period). An actuarial calculation is then made to determine how much needs to be contributed during the current year to grow to that computed balance.
Summary
The retirement area can be quite confusing, and there are specific requirements for each of these plans. The most important thing is to start saving something for retirement, even if you can only save a small amount each month. Feel free to call one of our retirement specialists at 801-225-6900 to review which one of these plans is going to work best for you. We’d love to help you! Thanks!
|
