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The 7 main types of retirement accounts in the U.S.

When it comes to saving for retirement, it does not have to be a scary situation, yet many people are unprepared. A 2017 Retirement Savings survey from GOBankingRates found that 55% of Americans have less than $10,000 saved for retirement. 1

There are 7 traditional types of retirement accounts to consider.2  Depending on your income level and savings goals you may find one type is better for you than another. Now is a great time to review your options.

 

1. The 401(k) and 403(b)

Probably the most commonly talked about retirement account is a 401(k). The 401(k) is a tax qualified defined contribution plan offered by some employers, wherein the employer withholds a percentage of your paycheck for retirement savings. These dollars are taken out pre-tax and remain tax deferred until they are withdrawn, up to a limit of , annually.3  Additionally, many employers will match your contributions, essentially giving you free money. These plans are offered by for-profit employers and can be rolled-over to another plan in the event you switch employers. The equivalent for teachers and others who work for public schools, charitable institutions or eligible non-profit organizations are referred to as 403(b) plans.4 As a government employee, the 457(b) and 401(a) are available and may allow for up to $55,000 per plan participant in tax free savings. 5

Read more: What is a 403(b)?

The 403(b) is a TSA (tax-sheltered annuity) available to teachers and employees of other non-profits in place of the 401(k). The 403(b) has lower administrative costs than a traditional 401(k). The maximum contribution for those employees under age 50 is $5,500 annually and $6.500 for savers over age 50, utilizing the $1,000 catch-up provision.

2. Solo 401(k)

A special type of the 401(k) is available to sole proprietors who can and make contributions as both the employee and employer, up to a total of $55,000 if under age 50 or $61,000 annually if over age 50, an increase from 2017 maximums.6  The major benefit to the Solo 401(k) is the two types of contributions available. First, there are elective contributions, made from the employee earnings. Secondly, there are non-elective earnings, made on behalf of the business. The Solo (k) is a great choice for solo proprietors, and C or S corporations that have no part-time employees working more than 1,000 hours per year.

3. The SEP

The SEP IRA, or simplified employee pension is most widely used by the self-employed and small business owners. The SEP IRA is extremely popular with sole proprietors that run their own business without employees. Business owners can contribute up to 25% of your income up to $55,000. SEP IRA’s are easier to set up than a 401(k) and can be done easily online.  However, because of the limitation calculations that are not flat numbers, it would be wise to consult with a certified accountant or certified financial planner when setting up a SEP. 7

4. Simple IRA

The Simple IRA is available to small businesses with fewer than 100 employees. The employer must either match the employee’s contributions dollar-for-dollar- up to 3% of the employee’s income or make a flat 2% contribution for all employees, regardless of income.  This is required even if the employee doesn’t contribute. Employees under age 50 can contribute $12,500. For those over 50, they are allowed to contribute an extra $3,000 (the catch-up provision) for a total of $15,500 annually.8

The Simple IRA, or Savings Incentive Match Plan for Employees. It is an easy way for employers to begin a start- up retirement savings plan for employees if the company does not offer another retirement savings plan to employees.

Read more: What is a simple IRA?

5. IRA

The individual retirement account is available to everyone. Savers under age 50 can contribute up to $5,500 and those over age 50 are allowed an additional $1,000 in the catch-up provision for a total of $6,500. If you or your spouse also contribute to an employer sponsored plans, there are limitations to how much you can deduct in the traditional IRA.

An Individual Retirement Account (IRA) is basically a savings account that allows those dollars saved to be tax deferred until they are withdrawn.  Any income from interest, dividends and capital gains can compound each year without being taxed.

6. Roth IRA

The primary difference between a Roth IRA and the other plans are that with a Roth IRA, there are unique tax advantages. You are contributing after tax dollars and there is no tax deduction for contributions but distributions in retirement are tax free.10 The money contributed will grow tax free and you will not pay a penalty for any withdrawals after the age of 59 ½. 11 The Roth IRA does not require that you take mandatory withdrawals at age 70, unlike other IRA’s. 12 In most cases, you can take withdrawals of the contribution amount (not the earnings on the contribution) without penalty. 13 However, there are income limitations for the Roth IRA. The maximum income is $135,000 for single filers and $199,000 for married couples filing jointly in 2018.  The maximum annual direct contribution is $5,500 unless you are over age 50 and the annual direct contribution maximum is $6,500. 14

Read more: What is a Roth IRA?

Another type of IRA, the Roth IRA is unique because contributions are made with after tax dollars and there is no tax deduction the time of contribution, but distributions (money taken out) in retirement are tax-free. A Roth IRA offers more flexibility because the distributions can be withdrawn at any time without penalty. The earnings or interest on the contributions cannot be withdrawn without penalty. You can only contribute to a Roth IRA if you have income from a job. Money saved or gifted to you cannot be used as contributions to a Roth IRA.  Roth IRA’s are generally a great choice for young savers who don’t want their money tied up with withdrawal penalties and may need to use the money to buy a home or new car in the next few years.

7. Health Savings Account (HSA)

The HSA is essentially a tax-free savings account created for the purpose of paying medical expenses. For those with high deductible health insurance plans, these are particularly useful. 15 Maximum contributions depend on whether you have a qualifying family health insurance plan or an individual plan. The maximum contribution for those with qualifying family plans is $6,900. Those with individual family plans can contribute up to $3,450. If you are over age 55, you are allowed an additional contribution to the individual plan contribution or family plan contribution. 16 When you set aside pre-tax dollars into an HSA, it grows tax-deferred and can be withdrawn tax-free during retirement to reimburse yourself for out of pocket qualifying medical expenses.

It is always a good idea to consult with your accountant or financial advisor on how retirement savings may affect your taxes and be sure you are comfortable with the plan you have chosen and understand contribution and withdrawal limitations.  Additionally, there are many life insurance and annuity products that compliment traditional retirement plans. Talk with your Foresters agent and see if any products would be of use to you in your holistic approach to personal financial planning.

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Disclaimer: All of the information provided is believed to be accurate and reliable at the time of publication (April 2018) ; however, Foresters Financial assumes no responsibility for any errors. This article provides general information and may not be applicable to you. Please consult a retirement planning professional to discuss your personal circumstances. Foresters Financial and its representatives do not offer tax, legal or estate planning services.

 

Sources:

1) https://www.gobankingrates.com/investing/half-americans-retire-broke

2) https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans

3) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limitsw

4) http://www.foresters.com/en/financial-solutions/savings-and-planning/planning-for-individuals/403(b)-retirement-savings-plan#gref

5) https://www.investopedia.com/articles/personal-finance/111615/457-plans-and-403b-plans-comparison.asp

6) https://www.irs.gov/retirement-plans/one-participant-401k-plans

7) https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps

8) https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-simple-ira-plan

9) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

10)https://www.nerdwallet.com/blog/investing/how-a-roth-ira-works/

11)https://www.rothira.com/roth-ira-withdrawal-rules

12)https://www.rothira.com/roth-ira-rules

13)https://www.rothira.com/blog/the-five-year-rule-with-roth-ira-withdrawals

14)https://www.forbes.com/sites/jamiehopkins/2017/12/21/4-reasons-to-start-using-a-roth-ira-in-2018/#731c804f11b8

15)https://www.investopedia.com/articles/personal-finance/090814/pros-and-cons-health-savings-account-hsa.asp

16) https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-sets-2018-hsa-contribution-limits.aspx

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Sarah is a 20 year plus veteran of the life insurance marketing business. She consults with insurance carriers and financial service providers on all aspects of sales and marketing. She also enjoys providing information and ideas to help agents build their practice and provide client service.