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Hey girl want to hear two scary words? Retirement Planning. Why does it have to be so dang intimidating? We all know that we are supposed to save for retirement, but where do we start? There are multiple vehicles for retirement funding. Today the financial planner in me is coming out and I’m going to show you the different retirement accounts that will fit YOU!
Self-employed? Check! Work for a non-profit? Check. Still working for the boss man? I’ve got you covered. In this article we will show you the seven types of retirement accounts and help you determine which is the best fit for your family.
Table of Contents
401(K) OR 403(B)
These accounts may be offered by your employer. Most companies offer a 401(k), however you may have a 403(b) package if you work for a non-profit or are employed by the government. As of 2016 you are able to save up to $18,000 of your pretax income. If you are 50 or older the maximum is $24,000.
If your employer offers a 401(k) match, do everything in your power to max this out. It is FREE MONEY! This is one of your greatest benefits over those that are self-employed.
As of 2016 you can contribute to 5,500 to an IRA if you are under 50 and $6,500 if you are over 50. If you earn more than $71,000 (single filers) a year or $118,000 (married filing jointly) you cannot deduct your IRA contributions if you participate in both and IRA and 401(k). If your employer does not provide you a retirement plan the income limits will not apply to you.
Contributions to a Roth IRA are NOT tax-deductible. With a Roth IRA you contribute with after-tax dollars, but you when you collect your distributions during retirement you will not have to pay taxes. This includes the growth of your account.
To qualify for this account, you must make less than $132,000 if you are single of $194,000 if you are married filing jointly.
You are able to collect on your money tax free after you have reached retirement age (59 1/2). There are also certain times when you are able to take distributions from your Roth IRA before retirement, these include, up to $10,000 for a down payment on a first house for yourself, spouse, children or grandchildren, higher education expenses for yourself, spouse, children or grandchildren, if you become disabled, or if your spouse dies or becomes disabled. If you do not meet one of these circumstances and still make a withdrawal you will incur a 10% penalty.
IF YOU ARE AN ENTREPRENEUR START HERE!
Did you know that 40% of entrepreneurs have not started saving for retirement? When running your own business it is logical to save for a rainy day, but the long term picture needs to be kept in mind too! I always argue that a safety net is necessary, but do not let fear force you to work forever because you did not plan for retirement. Below are three great options specifically for entrepreneurs.
The SEP (simplified employee pension) is designed for small business owners (go entrepreneurs!) With this plan you are able to contribute up to 25% of your income or $53,000 which ever is less. SEP IRAs operate similarly to traditional IRAs and your yearly contributions are tax deductible. SEP IRAs are tax deferred. You will not pay taxes on your contributions only on your distributions (when you pull the money out during retirement).
This type of account is best if you are a solopreneur. If you add employees, you will be legally required to make contributions on behalf of your employees. So keep this in mind if you are considering this option.
A SEP IRA can be easily completed with most financial agents by completing the IRS Form 5305-SEP; this will establish your plan. You are eligible for withdrawals after you have reached retirement age (59 1/2).
There are also certain times when you are able to take distributions from your Roth IRA before retirement, these include, up to $10,000 for a down payment on a first house for yourself, spouse, children or grandchildren, higher education expenses for yourself, spouse, children or grandchildren, if you become disabled, or if your spouse dies or becomes disabled. However, you will still pay taxes on the withdrawal as income. If you do not meet one of these circumstances and still make a withdrawal you will incur a 10% penalty as well as be responsible for taxes associated with the income.
A Solo 401(k) is another excellent option if your business only employs you or you and your spouse. If you are under 50 your yearly contribution limit is $53,000 or if you are over 50 you may contribute up to $59,000. The Solo 401(k) allows a personal loan to be taken out up to 50,000 or half of the account value, which ever is less. However, there is a penalty for withdrawals before retirement (59 ½ years).
SIMPLE IRA (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES OF SMALL EMPLOYERS):
You may be interested in considering this option if you have less than 100 employees in your business. If you are under 50 you can contribute up to $12,500, if you are over 50 the contribution is $15,500. This option has a significantly lower contribution limit than the other options for small business owners.