While it can be thrilling to imagine your retirement, many find building your nest egg overwhelming.
There are many retirement plans available. There are many retirement plans available. A long-term financial plan is the best way to feel confident in your retirement savings. You should also have a fiduciary financial professional on your team.
This article will provide a guide on the most popular retirement account types, their workings, and who they might be best for.
It is difficult to choose the best savings vehicle. When you're planning your retirement, there are many factors to consider: your age, income and the ideal tax-optimization strategy. These are common retirement plans and criteria that you should consider.
Tip: Use our free personal finance tools to help you plan your retirement. Personal Capital's Retirement Planner is a good place to begin. It will help you evaluate your retirement readiness and pinpoint areas that need improvement.
1. Traditional 401k
The 401k is one of the most well-known and popular investment tools. It's an employer-sponsored retirement plan that allows you to save tax-free for retirement.
Continue reading What's a 401k, anyway? – A Comprehensive Guide
Traditional 401k contributions are made using pretax dollars. This reduces your taxable income, and allows your contributions to grow tax-deferred up until retirement.
The contribution limit for 2022 is $20,500 (222,500 in 2023), while individuals 50 years and older may contribute an additional $6,500 (7,500 in 2023).
Employers might offer a profit sharing or employer match program, where they contribute a percentage to your 401k plan. Employers may have different vesting requirements. For example, if you are employed for a specific number of years, employers can use that. Contributions made by your employer can be 100% vested immediately. This means that you have full control of the money once it has been applied to your 401k account. To receive the match benefit from your employer, you must contribute at least that amount.
To avoid penalties when withdrawing contributions from your retirement plan, consult your financial advisor. Withdrawals from 401ks made before the age of 59 1/2 are subject to a 10% penalty and ordinary income taxes, which are taxed at your highest marginal rate. There are some IRS exceptions to the early withdrawal penalty. However, withdrawing money from your 401k before the age of 59 1/2 or 72 (for Required Maximum Distributions) is not recommended.
Ideal for: A traditional 401k plan is a good option if you believe you will be in lower marginal tax brackets when you withdraw funds in retirement.
2. Roth 401k
Some employers offer an Roth401k option to employees in addition to traditional 401k plans. Roth 401k contributions, which are made with after-tax money, provide tax-deferred growth and tax-free withdrawals, as long as the rules are followed.
Roth 401k users have the same options as traditional 401ks. They can contribute up $20,500 in 2022. Individuals over 50 may also contribute an additional $6,000.
Individuals who withdraw from their Roth 401k before turning 59 1/2 could be subject to a 10% withdrawal penalties on a portion. A Roth 401k is subject to Required Minimum Distributions (RMD), which are mandatory starting at 72.
Ideal for: Roth 401k accounts can be funded with after-tax dollars. This retirement account is ideal for people who think they are in a lower tax bracket than they will in the future. Individuals aged 59 1/2 and older can use a Roth 401k account to avoid paying taxes on withdrawals. They can also continue growing their accounts tax-free. You can also avoid RMDs by rolling your plan into a Roth IRA once you are 59 1/2 years old or no longer work for the employer. Roth accounts can be a powerful legacy planning tool.
3. Traditional IRA
Are you sure that your 401k contributions are maxed? Is your employer offering a 401k or matching program? An Individual Retirement Account (IRA) is a great option for you and your retirement goals if this is the case.
Traditional retirement accounts are retirement accounts you open yourself (not through your employer) and that you fund with eligible earned income.
You can contribute to an IRA even if your employer has a 401k plan. You should be aware of the income limitations for contributions.
Individuals can contribute up $6,000 in 2022 (if you're 50 or older) or $6,500 (2023 if you're 50 or older)
Your income level may affect whether you are eligible to deduct some or all of your contributions.
- Joint filers can get a full deduction up the limit of the employer-sponsored retirement plan if neither spouse is eligible.
- You can claim a partial deduction if you file as a single, or head of household, and your employer-sponsored retirement plan covers you. If your income in 2023 is $73,000 to $83,000, you can claim a partial deduction. Single filers with a MAGI greater than $83,000 in 2022 are not eligible for a deduction.
- You can deduct the entire amount if you are married or a widow(er) and you file jointly under an employer-sponsored retirement program. If your income in 2023 is between $116,000 to $136,000, you can claim a partial deduction. If you earn more that $136,000 in 2023, there is no deduction.
- Married filing separately can be eligible for a partial deductible if your MAGI falls below $10,000
In general, all withdrawals from a traditional IRA are subject to both federal and state income tax. As with traditional 401ks a 10% penalty is applied to any withdrawals made before the age of 59 1/2. There may be exceptions so make sure to consult your financial advisor before you withdraw from your IRA.
Ideal for: Traditional retirement accounts are best for people who have exhausted their 401k plans and don't have access to employer-sponsored retirement plans. IRAs offer more investment options, such as individual stocks or ETFs. However, the 401k plans might only have a limited number of funds.
4. Roth IRA
Roth IRAs are different from traditional IRAs. They offer tax-deferred growth, and no taxes for withdrawals when the right circumstances apply. Roth IRA contributions can't be deducted from income taxes.
Contributions to a Roth IRA can be made even if you have a traditional IRA or 401k plan. You should know that if you make contributions to both a Roth IRA and a traditional IRA, the yearly limit applies to both. The total contribution cannot exceed the limit.
These are the contributions limits you can make in 2023.
- Single tax filers with a 2023 MAGI less than $138,000 will have the ability to contribute up to $6,500. If you are 50 years old or older, your contribution limit will increase to $7,500. Single filers with MAGI between $138,000 to $153,000 will see the contribution limit gradually reduce. Roth IRA contributions are not available for those with MAGIs greater than $153,000.
- If your 2023 MAGI falls below $218,000, married couples filing jointly can contribute up to $6,500 per year. The maximum annual amount for those 50 years and older is $7,500 For married couples with a MAGI of between $218,000 to $228,000., the Roth IRA contribution limit begins to decrease and is phased out. Those with a MAGI of more than $228,000 are not eligible to contribute to a Roth IRA.
- Married couples who file separately with a MAGI exceeding $10,000 will not be eligible for a Roth IRA. Contributions at a lower level will be available to those with a MAGI of less than $10,000.
- If a tax filer reports as head or married filing separately but has not lived with their spouse for the past year, they will be allowed to follow the rules and limits applicable to single filers.
You can convert funds from a traditional IRA or 401k plan to a Roth IRA. Conversions from other retirement accounts do not affect your 2023 contribution limit. However, they may increase your MAGI and trigger a phaseout in your Roth IRA contribution amount. People who have income restrictions and aren't eligible for Roth contributions can convert dollars from their traditional retirement plans. Discuss this possibility with a tax professional or accountant to determine if it is a good fit for your financial plan.
Ideal for: RothIRAs allow retirement savings to grow tax-free and can be withdrawn tax-free at any time. Roth IRAs are also free to be left alone. There are no minimum distributions (RMDs), so you can leave them as an inheritance or use them as a future nest egg. If you believe your retirement tax bracket will be higher, Roth accounts can be a good investment tool. It's best to pay taxes now if you believe you will be taxed more in retirement.
5. SEP IRA
SEPIRAs (Simplified Employer Pension) could be another tool to help you reach retirement goals. SEP IRAs, which are profit-sharing plans, allow business owners to contribute to their employees' retirement savings as well as their own. Employers can make tax-deductible contributions for their employees through a SEP IRA.
SEP IRAs must include employees over 21 who have worked in the same employer for at least 3 years and have received compensation of at least $600 from the employer for the year. However, some plans have more restrictive eligibility requirements.
SEP IRA contribution limits can be higher than traditional IRA limits. Contributions cannot exceed 25% of eligible compensation, or $66,000 in 2023. Important to remember that contributions cannot exceed 25% of eligible compensation or $66,000.
SEP IRAs have many contribution rules and guidelines. Talk to a financial advisor or visit the IRS Guidelines page.
Best for: Small business owners often don't have enough employees to cover a full-fledged 401k. A SEP IRA can be a great option because it has minimal administration costs.
6. SIMPLE IRA
SIMPLEIRAs (Savings Incentive Match Plan for Employees) is another option that small business owners have. These are a great option for small businesses with less than 100 employees who don't have a retirement plan. They are easy to set up and can be used by any business that has less than 100 employees. If the SIMPLE IRA is being set up, an employer cannot have another retirement plan.
SIMPLE IRAs are similar to a company-sponsored 401k. Employees can contribute via salary deferrals.
The deferral limit on a SIMPLE IRA will be $15,500 in 2023.
Employers are required to contribute a match contribution of up to 3% to the employee's compensation each year. This is based on an eligible compensation amount of $330,000 in 2023.
The following are eligible employees: Those who have earned at least $5,000 in any two years prior to the current calendar calendar year, and those who expect to earn at least $5,000 during this calendar year. You should consult a financial advisor before you withdraw from your retirement account. SIMPLE IRAs can have special penalty.
Ideal for: SIMPLEIRAs are ideal as a start up retirement savings plan for small businesses (less than 100 employees), that do not have a retirement plan. SIMPLE IRAs are typically lower than traditional retirement savings plans in terms of administrative and start-up costs. SIMPLE IRAs don't require filing, so they are easier to manage than other traditional retirement savings vehicles.
7. Self-Directed IRA
Self-Directed IRAs have similar eligibility requirements to traditional and Roth IRA options. They also follow the same contribution guidelines. Self-Directed IRAs permit investors to have assets such as private-held securities, real estate, and gold.
An investor must partner with a trustee to establish a Self-Directed IRA.
It is important that you know the IRS prohibits certain investments such as collectibles or life insurance.
Perfect for: Because of the complexity and high fees involved in self-directed IRAs and the potential for serious problems, traditional and Roth IRAs can often be simpler options for achieving your retirement planning goals.
Like 401k plans 457 plans can be offered by both state and local governments as well as nonprofits. 457 plans can also be funded by payroll deductions. This means that the employee will get tax-deferred growth up to withdrawals.
The contribution limit for 457 plans will be $22,500 in 2023. Employees 50 years and older can add a $7,500 catch-up provision to their contribution limit.
The key difference with 457 plans is that early withdrawals prior to age 59 1/2 are exempt from penalties but still subject to ordinary income tax rates.
Participants nearing retirement may be able to make up for years they didn't contribute to the 457 plan. The IRS contains more information on 457 plans. However, it is advisable to consult the plan administrator regarding withdrawal and contribution guidelines.
403 (b) plans are retirement plans that certain employees of public schools or tax-exempt 501(c). The 403(b), which allows employees to contribute some salary to the tax-deferred plans, is also available for employers.
The following are eligible employees for the 403(b), plans: Employees who work in public schools, state universities, churches, or certain ministries.
Similar to traditional 401ks and 457s or IRAs. 403(b), retirement plans allow employees the opportunity to save for retirement. The funds will not be subject to tax until they are withdrawn.
Roth contributions are also available in 403(b), 457, and 457 plans.
Tip Personal Capital now provides retirement plan advisors as part our holistic wealth management services.
Considerations when choosing a retirement plan for 2023
There are many options available for retirement savings vehicles, as you can see. We recommend that you consult a financial advisor to determine the best investment tools for you, based on your employer's offers, your income level, and your tax-optimization goals.
These are just a few ideas:
- Take a look at the power of time to help you retire with our study on balances in 401k by age
- Learn 7 Essential Steps to Retirement Planning
- Sign up for Personal Capital to get a complete view of your finances, including retirement funds, and receive free financial tools
- Calculate your retirement readiness today
Frequently Asked Questions
What is the best precious metal to invest in?
An investment in gold can yield high returns on its capital. It protects against inflation, as well as other risks. As people worry about inflation, the price of gold tends increase.
It's a good idea to purchase gold futures. These contracts assure you that you will receive a specified amount of precious metal at a fixed price.
However, futures on gold aren't for everyone. Some prefer physical gold.
They can trade their precious metals with others. They can also make a profit by selling their gold at any time they desire.
Some people want to avoid paying tax on their gold. They buy gold directly from government to do this.
This will require you to make multiple trips to your local postal office. First convert any gold that is already in circulation into coins or bars.
You will then need to obtain a stamp for the coins and bars. You then send them to US Mint. They will then melt down the bars and coins to create new coins.
These new coins and bars are stamped with the original stamps. This means they are legal tender.
You won't need to pay taxes if gold is purchased directly from the US Mint.
Which precious metal would you prefer to invest in?
How much are gold IRA fees?
The average annual fee of an individual retirement account is $1,000. There are many types and types of IRAs. These include traditional, Roth or SEP-IRAs as well as SIMPLE IRAs. Each type has their own set of rules. If your investments are not tax-deferred, you might have to pay taxes on the earnings. Also, consider how long the money will be kept. If you have a long-term goal of holding on to your money, you'll be able to save more money if you open a Traditional IRA.
You can contribute up to $5500 per year to a traditional IRA (or $6500 if you are 50 or older). A Roth IRA allows for unlimited annual contributions. The difference between the two is simple. A traditional IRA can be withdrawn after retirement without any taxes. A Roth IRA will entail taxes for any withdrawals.
Are gold IRAs a good idea?
You can invest in gold by purchasing shares in companies that mine it. These companies are a great way to make money investing in precious metals like gold.
The downside to owning shares is that you can't directly control them.
The first is that you could lose money if your stock is held on for too long. Stocks that fall are less than their underlying asset (like silver) and can end up losing more money. You could lose your money, rather than make it.
Second, you could miss out on potential profit if you wait for the market to recover before you sell. So you may need to be patient and let the market recover before you profit from your gold holdings.
If you prefer to keep your investments apart from your finances, physical gold is still an option. An IRA in gold can diversify your portfolio and protect you against inflation.
You can learn more about gold investing by visiting our website.
What is a Precious Metal IRA (IRA)?
Precious and precious metals are excellent investments for retirement accounts. They have held their value since biblical times. A great way to diversify and protect your portfolio is to invest in precious metals such silver, gold, and platinum.
Certain countries even allow their citizens to save money in foreign currencies. You can purchase gold bars from Canada and keep them at your home. Then, you can buy gold bars in Canada and sell them for Canadian dollars when your family is home.
This is an easy way to invest precious metals. It is particularly useful for those who live outside North America.
Does a gold IRA make money?
The answer is yes, but not as much as you think. It depends on what level of risk you are willing take. If you can afford to invest $10,000 every year for 20-years, you could possibly have $1,000,000 by retirement age. You'll end up losing everything if you place all your eggs in the same basket.
Diversify your investments. Inflation makes gold a good investment. It is important to invest in assets that increase with inflation. Stocks do this well because they rise when companies increase profits. This is also true with bonds. They pay annual interest. So they're great during times of economic growth.
What happens when inflation is absent? When there is no inflation, stocks and bonds will lose even more value. Investors should not put all of their savings in one investment such as a stock mutual fund or bond.
Instead, they should invest in a mix of different funds. They could invest in stocks or bonds. They could invest in both cash as well as bonds.
They are exposed to both sides of a coin. They can see both the inflation and the deflation sides of the coin. They will continue to see a rise over time.
- The maximum yearly contribution to an individual's IRAs is currently $6,000 ($7,000 for those 50 years or older), or 100% of earned income, whichever is less. (monex.com)
- SEP-IRA”Simplified employee pension” For self-employed people like independent contractors, freelancers, and small-business ownersSame tax rules as traditional IRASEP IRA contributions in 2022 are limited to 25% of compensation or $66,000, whichever is less4. (sltrib.com)
- To qualify as IRA allowable precious metals and be accepted by STRATA, the following minimum fineness requirements must be met: Gold must be 99.5% pure, silver must be 99.9% pure, and platinum and palladium must both be 99.95% pure. (stratatrust.com)
- Same tax rules as traditional IRA SEP IRA contributions in 2022 are limited to 25% of compensation or $66,000, whichever is less Before setting up a Silver IRA, understand the fees and IRS restrictions. (sltrib.com)
- Gold IRA: Add some sparkle to your retirement nest egg
- Understanding China's Evergrande Crisis – Forbes Advisor
How to Decide if a Gold IRA Is Right for You
The most popular type of retirement account is the Individual Retirement Account (IRA). IRAs can be obtained through banks, financial advisors, mutual funds, employers and banks. The IRS allows individuals up to $5,000 in annual contributions without tax consequences. This amount can go into any IRA. There are limitations on the amount of money that you can contribute to certain IRAs. For example, a Roth IRA contribution is not allowed if you are less than 59 1/2. You must wait until your age 70 1/2 to make contributions if you are under 50. Some people may also be eligible for matching contributions if they work for their employer.
There are two types: Roth and Traditional IRAs. Traditional IRAs allow you to invest in stocks, bonds and other investments. A Roth IRA allows you to only invest in after-tax dollars. Roth IRA contributions are not subject to tax when they are made, but Roth IRA withdrawals are. Some people choose to use a combination of these two accounts. Each type of IRA has its pros and cons. So what should you consider before deciding which type of IRA works best for you? Keep these three things in mind:
Traditional IRA Pros
- Each company has its own contribution options
- Employer match possible
- More than $5,000 in savings per person
- Gain tax-deferred until withdrawal
- Limitations may apply based on income levels
- The maximum contribution limit is $5,500 per year ($6,500 if married and filing jointly)
- The minimum investment is $1,000
- You must start receiving mandatory distributions after age 70 1/2
- You must be at the least five years of age to open an IRA
- Transfer assets between IRAs is not possible
Roth IRA pros:
- No taxes owed when contributing
- Earnings grow without paying taxes
- No required minimum distributions
- Only stocks, bonds, mutual funds are available as investment options.
- No maximum contribution limit
- There are no restrictions on the transfer of assets between IRAs
- To open an IRA, you must be 55 years old or older
It is important to understand that not all companies offer the exact same IRAs when opening a new IRA. Some companies allow you to choose between a Roth IRA or a traditional IRA. Others allow you to combine them. Noting that different types IRAs have different requirements, it's worth noting. For example, a Roth IRA has no minimum investment requirement, whereas a traditional IRA requires a minimum investment of just $1,000.
The Bottom Line
It is important to decide whether you want taxes now or later when you choose an IRA. If you're planning to retire in the next ten-years, a traditional IRA may be the best option. If you are not able to retire within ten years, a Roth IRA may work better for you. It doesn't matter what, it is a good idea consult a professional to discuss your retirement plans. You need someone who knows what's happening in the market and can recommend the best options for your situation.
By: JJ Lester, CFP®
Title: Types of Retirement Plans for Individuals in 2023
Sourced From: www.personalcapital.com/blog/retirement-planning/types-of-retirement-plans/
Published Date: Thu, 10 Nov 2022 16:00:27 +0000