- 401(k) Plans
- Individual Retirement Accounts (IRAs)
- Roth IRAs
- Savings Incentive Match for Employees (SIMPLE) IRA
- Simplified Employee Pension (SEP) IRA
In the United States, most people cannot count on an employer-based pension, which is why knowledge of these five types of retirement plans is critical to a person’s financial well-being during their senior years. While Social Security is currently available as a fall-back plan, it does not provide enough income for most seniors to live comfortably, and it may not exist in its current form in the coming decades. Understanding the types of accounts that are available could help a person take action and start a solid foundation for their finances.
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1. 401(k) Plans
A 401(k) plan is a retirement account associated with an employer. Employees can save money for retirement in this type of plan through payroll deductions. Some employers will make contributions to the account as a benefit. Employers can add up to six percent of a person’s salary per year. The earnings from a traditional 401(k) are not taxed until they are withdrawn, usually after retirement.
2. Individual Retirement Accounts (IRAs)
IRAs allow a person to manage their own investments or hire someone to do it for them. They can be used to invest in stocks, bonds, mutual funds, and more. If a person maxed their 401(k) contributions, they can add to an IRA. A person whose employer does not offer a 401(k) can also start an IRA. People must pay any applicable local, state, and federal income taxes on their IRA withdrawals.
3. Roth IRAs
A Roth IRA allows a person to save with post-tax dollars. The person pays income tax on the money when they earn it. The money is never taxed again. No matter how much growth the Roth IRA account has, the government will not tax the interest that it accrues over the entire lifespan of the account. A person can withdraw money from their Roth IRA without a penalty if it has been at least five years since they opened the account. There is no age minimum or maximum for starting withdrawals.
4. Savings Incentive Match for Employees (SIMPLE) IRA
A SIMPLE IRA is an IRA for small businesses that have up to 100 employees. It is similar to a regular IRA. The money grows in a tax-deferred account, and it is taken out of a person’s paycheck on a pre-tax basis. As such, it lowers a person’s taxable income. There are penalties of 25 percent if a person withdraws any of their money before the age of 59 1/2 years.
5. Simplified Employee Pension (SEP) IRA
According to The Balance, another type of plan for retirement that everyone should be aware of is the SEP IRA. This is for people who are self-employed and do not have any employees. A person who is self-employed can sock away 25 percent of their annual income, up to $56,000 per year, into an SEP IRA. These contributions are 100 percent tax-deductible from the person’s income. For example, a self-employed person who had $100,000 in income can put $25,000 into their SEP IRA, lowering their taxable income to $75,000.
Most people do not save enough for their retirement years, and there are many reasons for this. Low wages or stagnant wages compared to inflation; high costs for healthcare, housing, and education; and families who are stretched thin because of the need to put food on the table and clothes on the backs of their children today. By getting started with one of these five types of retirement plans as soon as possible, a person can have more peace of mind about their financial future.