Compare Different Types of Retirement Plans to Help Select the One Best for You
Whether just starting a career or reaching its end, everyone should prepare to retire, or at least think about it. It’s essential to set yourself up for a comfortable financial future without relying only on Social Security. But with so many different types of retirement plans available, we’ll help you discuss savings plans, tax-free accounts, and more.
Understanding the Different Types of Retirement Plans
Out of the many options, there are six that most people utilize:
The 401(k) plan has some enticing benefits, such as your employer’s potential matching contributions and the ability to reduce your taxable income. However, you may only have a few investment choices available, and it can take several years before you become fully vested in the plan.
As an employee, this type of retirement plan is very accessible to set up and manage, since companies often make them straightforward. You’re able to contribute up to $20,500 (or $27,000 if over 50) into the 401(k), with a maximum combined contribution of $61,000 (or $67,500 for over-50s). Tax-free growth ensures that all earnings remain untaxed until withdrawal at age 59 or later.
As tax-free retirement accounts, traditional IRAs offer attractive tax benefits that make them ideal for those who don’t have access to an employer’s 401(k). You can contribute with pre-tax dollars, and the resulting gains are free from taxation until withdrawn.
While the yearly limit of $6,000 (or $7,000 if you’re 50 or over) is comparatively low, various IRA plans from different providers offer a broad selection of investments ranging from stocks to mutual funds. Remember, though, in some cases, traditional IRA contributions won’t qualify as tax-deductible if your income exceeds certain thresholds.
There are several advantages to Roth IRAs, including the following:
- No tax on withdrawals during retirement
- Increased flexibility with age limits for contributions and withdrawals
- Potentially less tax overall.
As opposed to other plans, which offer an upfront deduction for your contributions but require taxation of money withdrawn during retirement, Roth IRAs allow you to pay the tax upfront when you put money in.
It’s important to consider if you expect to be in a higher or lower income bracket at retirement. Generally speaking, those expecting a lower rate are more likely to benefit from traditional IRAs, while those expecting higher rates may do better with Roths. Additionally, one can only contribute up to certain thresholds depending on income level.
The SEP IRA, or Simplified Employee Pension, offers generous and advantageous benefits for self-employed individuals or small business owners looking to save for retirement. With the ability to contribute up to 25% of each employee’s salary (with a cap of $66,000) in 2022 and providing immediate 100% vesting in employer contributions, this plan may be more straightforward and cost-effective than a traditional 401(k). With high contribution limits and immediate vesting, the advantages are clear, but keep in mind that if you’re an employer, immediate employee vesting could be a drawback.
The Simple IRA is an excellent option for small business owners with 100 or fewer employees and offers many perks. For those participating, employers can contribute up to 3% of your salary or must guarantee 2%, regardless of how much you add. These contributions are yours to keep even if you part ways with the organization. Additionally, in 2023 you can set aside $15,500 from your earnings ($17,000 if 50+) into this plan.
Tax-Free Retirement Account
A Tax-Free Retirement Account (TFRA) is an alternative to a Roth IRA that does not have the same IRS withdrawal limitations. Contributions are subject to taxation upon entry, but any growth afterward is not. Additionally, this type of account comes with a ‘floor,’ so you will never lose money due to dips in the market.
TFRAs also offer various forms of protection for chronic and critical illnesses and a permanent death benefit from day one. Lastly, there are no contribution limits like traditional retirement accounts, though they must comply with life insurance rules and regulations.
How Many Retirement Accounts Can I Have?
Having multiple retirement accounts can help you diversify and maximize your retirement savings. However, there are certain restrictions on how many accounts you can open and how much money you can contribute to them each year, depending on the type of account.
When it comes to individual retirement accounts (IRAs), there is no limit to the number of retirement accounts you can have. However, it is essential to understand that whether you have a single IRA or multiple, you cannot exceed the maximum total amount allowed per year. In general, the maximum amount that you can contribute to all of these accounts combined is $6,000 a year for people under 50 years old. If you’re over 50 years old, the maximum contribution increases to $7,000 a year.
Like IRAs, there is no limit to the number of 401(k) accounts you can open. The most significant difference is that you can only contribute new savings to the plan provided by a current employer.
Want to Discuss and Compare Retirement Savings Options? Reach Out to Summit Wealth Partners
As you navigate the different types of retirement plans, it’s only natural to have questions about them. The experts at Summit Wealth Partners are always available if you still have questions about how many retirement accounts you can have or want to compare retirement saving options based on your specific objectives.
From wealth management strategies for high-net-worth individuals to business solutions for owners navigating the tricky waters of 401(k) accounts, we have decades of experience helping our clients set themselves up for comfortable, financially sound retirements. Reach out today to schedule an appointment with Summit Wealth.