What Retirement Accounts Are Right For Me?
“Save, save, save…” We’ve heard this expression coming from our friends, family, and seasoned financial professionals. We know we should save but don't know how. Thankfully, Uncle Sam is willing to help you save for retirement! The federal government has implemented a number of tax-advantaged retirement accounts, including popular ones such as 401(k) and individual retirement accounts (IRAs).
Below we will discuss some retirement accounts you can leverage to help you save and reduce your tax liabilities.
401(k) or 403(b)
The most common choice among retirement plans. Depending on the employer, some offer to match your contributions made throughout the year to your retirement account. We highly recommend you take advantage of this opportunity, it’s essentially free money!
Let your employer know you want to make regular contributions throughout the year. The money will be withheld as a payroll deduction on your paycheck. The contributions you make throughout the year can save you up to $18,500 of your pretax income in 2018 ($24,500 if you are 50 or older).
The money that gets contributed whether by you or your employer is YOURS. If you leave your job, don’t forget about your retirement account. You can roll the account over into a new employer’s 401(k) or your own IRA. A 401(k) is usually offered by a for-profit company, while teachers and other employees of nonprofits may be offered a 403(b) instead.
Solo 401(k)
A 401(k) qualified retirement plan designed specifically for self-employed individuals with no full-time employees other than the business owner and their spouse. Self-employed workers who qualify for the Solo 401(k) can receive the same tax benefits as in a general 401(k) plan, but without the employer being subject to the complexities of ERISA (Employee Retirement Income Security Act of 1974). Take advantage of this opportunity by setting up an individual 401(k) and make contributions as both the employee and employer, up to a total of $55,000 in 2018 (or $61,000 for someone over 50).
SEP IRA
SEP is an individual retirement account that stands for simplified employee pension. This type of account is utilized by self-employed or small business owners. As an employer, the contribution limit is up to 25 percent of your income or $54,000, whichever is less, in 2018. These accounts are easier to set up than a solo 401(k). If the self-employed person does have employees, all employees must receive the same benefits under a SEP plan.
Simple IRA
Permits employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. Employers must either match employee contributions or make unmatched contributions. An employee can contribute up to $12,500 in 2018, with an extra $3,000 allowed for those over 50.
IRA
Every year you're allowed to make contributions to an individual retirement account, and traditional IRAs are a great way to let your retirement savings grow without any taxes coming due until you take withdrawals from the account. For 2018, the contribution limit for individual retirement accounts is $5,500 ($6,500 if you’re over 50). Also please keep in mind, you are allowed to contribute to both an IRA and a 401(k), but if you’re covered by a retirement plan at work, you won’t be allowed to deduct your IRA contributions from your taxable income if you earn more than $73,000 annually (for single filers) or $121,000 (married filing jointly). You only get a partial deduction when earning $63,000 and $101,000, for single filers and those married filing jointly, respectively. If you’re not covered by a retirement plan at work, you get the full deduction no matter what your income, unless you file jointly with a spouse who has a retirement plan at work.
Roth IRA
Allows you to contribute your after-tax dollars to a retirement account that grows tax-free. However, contributions made are not tax deductible on your return. Also, no tax is paid on withdrawals after the age of 59 1/2. One of the advantages, unlike traditional IRAs, there is no mandatory withdrawal at age 70, but you are allowed to withdraw amounts no greater than your original contribution at any time, with no penalty or no taxes due.
To be eligible to contribute to a Roth IRA, you must make less than $135,000 (if you’re single) or $199,000 (if you’re married filing jointly). If your income is more than $120,000 (single) or $189,000 (married filing jointly), the allowed contribution is reduced. You can contribute to both a Roth IRA and a traditional IRA, but the limits apply to your total contribution. Some people who make too much to contribute to a Roth IRA contribute to a conventional IRA and convert it into a Roth later.