finances
Types of retirement accounts
The ability to retire with financial security is a goal for millions of people across the globe . Though people may stop working in retirement , many of their existing bills , and even some new ones , will still need to be paid . Retirement is often imagined as a time of unbridled financial freedom , but thatÕs only possible when individuals , including young professionals , prioritize planning for the day when they call it quits .
Retirement accounts and plans are a popular way to save for life after working . Individuals have various retirement plan options at their disposal , and each is unique in its own way .
Individual Retirement Account ( IRA ) An IRA is a tax-advantaged way to save for retirement . Anyone with earned income can open an IRA . Money deposited into an IRA cannot be withdrawn prior to account holders reaching 59.5 years of age without incurring a steep tax penalty of 10 percent . There are limits to how much individuals can deposit into an IRA . The Internal Revenue Service notes that the deposit limit for all IRA accounts in 2021 was $ 6,000 ($ 7,000 for account holders age 50 and over ). In addition , there are different types of IRAs , including traditional IRAs , Roth IRAs , Payroll Deduction IRAs , and SIMPLE IRAs . Each has its rules regarding taxes , eligibility and withdrawals , and individuals are urged to discuss which type of IRA is best for them with a financial professional .
401 ( k )
A 401 ( k ) is another tax-advantaged retirement account typically offered through an employer , though self-employed individuals can enroll in a
Solo 401 ( k ) plan . When enrolled in a 401 ( k ) plan , employees will have a portion of each paycheck direct deposited into a long-term investment account . Contributions to a 401 ( k ) are made pre-tax , which saves account holders a considerable sum of money so long as they continue to make contributions . One significant advantage to 401 ( k ) plans is that many employers will match contributions up to a certain percentage . For example , some may match up to 2 percent , so employees who contribute 2 percent or more will actually be depositing no less than 4 percent of their income each week into their 401 ( k ) accounts . Perhaps most beneficial is that employer matches do not count toward the annual 401 ( k ) contribution limits , which the IRS notes were $ 19,500 in 2021 .
Simplified Employee Pension ( SEP ) Plan
An SEP plan is typically established by a small business owner or self-employed individual . However , small business owners can set them up for their employees as well . Contributions to an SEP will reduce taxable income , and the money will grow taxdeferred . Individuals enrolled in an SEP will only pay taxes on the money upon withdrawal . One of the advantages to an SEP is it has significantly higher contribution limits , which the IRS notes were $ 58,000 or 25 percent of the employee ’ s compensation , whichever was lower , in 2021 . However , SEPs are employer contribution only , so they rely a lot on employers ’ available cash .
No retirement accounts are the same . Individuals are urged to conduct their own research and choose the plan that best suits their needs .
24 • SENIOR LIVING 2022