Most people are working hard to eventually be able to not have to work while still being financially secure. However, in order to do this, it does require comprehensive retirement planning in order to ensure you are able to maintain the quality of life you desire in your golden years.
There are various retirement planning strategies that you can choose from, each with its own advantages and disadvantages. Here are some of the most common types of retirement plans available.
401(k) Plan
A 401(k) plan is one of the most popular types of retirement plans. This type of plan is offered by employers and allows employees to contribute a portion of their pre-tax income toward their retirement savings. Many employers also offer matching contributions, which can help boost the employee’s retirement savings even further. The annual contribution limit for 401(k) plans in 2023 is $20,500.
Traditional IRA
Similar to a 401(k), a traditional IRA is an individual retirement account that allows you to contribute pre-tax dollars to your retirement savings. However, unlike a 401(k), a traditional IRA does not require sponsorship from an employer.
You can contribute up to $6,000 per year to a traditional IRA. These contributions are tax-deductible. The earnings in a traditional IRA are tax-deferred until you withdraw them, at which point they are taxed as ordinary income.
Roth IRA
A Roth IRA is similar to a traditional IRA, but the contributions are made with after-tax dollars. This means that the contributions are not tax-deductible, but the earnings in the account are tax-free. You can contribute up to $6,000 per year to a Roth IRA which offers tax-free growth and withdrawals.
Solo 401(k) plan
A Solo 401(k) plan is a retirement plan designed for self-employed individuals or small business owners with no employees. It allows you to make both employee and employer contributions to your retirement savings, which can help you save more for retirement. The annual contribution limit for Solo 401(k) plans in 2023 is $58,000.
SEP IRA
Another retirement plan designed for self-employed individuals or small business owners; a Simplified Employee Pension (SEP) IRA allows you to make tax-deductible contributions to your retirement savings. The annual contribution limit for a SEP IRA is higher than a traditional or Roth IRA. In 2023, the contribution limit for a SEP IRA is up to 25% of your compensation or $61,000, whichever is less.
SIMPLE IRA
Designed for small businesses with 100 or fewer employees, a Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan with an annual contribution limit of $14,000 for 2023. It allows employees to contribute a portion of their pre-tax income towards their retirement savings while the employer must also make contributions.
Choosing the right retirement plan depends on your financial goals, income, employment status, and various other factors. It is important to research and understand the different types of retirement plans available to you. Contact us to see if one of our financial advisors may be able to offer you some advice. However, the most important thing is to start saving for retirement as early as possible, since the earlier you start, the more time your money has to grow.