The earlier that you start investing in your retirement, the more money that you may have when it comes time to stop working. However, it’s not just about when you start saving, but how much you put away and the type of retirement plan you use. There are numerous different types of retirement savings plans out there – consider the following overview, and call our retirement planning professionals for more information.
Simplified Employee Pension (SEP)
A SEP plan is a type of retirement savings plan designed for business owners and the self-employed. While these types of plans are similar to IRAs, they often have higher monthly contribution limits. The same transfer and rollover rules that apply to traditional IRAs also apply to SEP IRAs.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
IRA stands for individual retirement account. When certain conditions are satisfied, a Roth IRA allows for retirement savings withdrawals that are tax-exempt, making it one of the best savings plans types. This is different from a traditional IRA in that the contributions to a Roth IRA are not tax-deductible (when you contribute to a traditional IRA, you can deduct the contributions from your taxes upfront). There is also a per-year contribution limit; in 2020, this amount was $6,000. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
You may not be familiar with a 457 plan, especially if you’re a private industry employee. These types of retirement savings plans are typically offered by state and local governments, as well as some nonprofit companies. These types of plans are very similar to 401(k) plans, but for who they are designed to serve. With a 457 plan, a participant is allowed to contribute up to 100 percent of their salary, and any interest and earnings on the investment are not taxed until withdrawal.
One of the most common types of retirement savings plans, 401(k) plans allow employees to make contributions to their 401(k) through direct deposit paycheck withholdings, and then employers will match the contributions or a portion of the contributions. Typically, the money will not be taxed until it is withdrawn by the employee.
Other Types of Retirement Plans
The above list of retirement plans is not inclusive – other types of plans that exist include 403(b) plans, SIMPLE IRA plans, SARSEP plans, payroll deduction IRAs, profit-sharing plans, defined benefit plans, money purchase plans, ESOPs, and government plans.
To learn more about the types of retirement plans that exist and which one might be most appropriate for you, call our experienced professionals at Harvest Financial Planning, LLC for the retirement planning advice you can trust. We look forward to working with you!