Types of Retirement Accounts: What Are Your Options?

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For some people, retirement is one of those topics that are either too awkward or too frightening to discuss. After all, talking about retirement means looking into the future and, frankly, not everyone is capable nor comfortable with going that far ahead into their lives.

A lot of things can happen between now and your planned date of retirement, and within that long period comes several risks and other variables that we could possibly account for.

 

As one wise man once said, however, luck favors the prepared. And the same can be said for planning your retirement.

 

Here at 121 Financial Credit Union, we believe in arming people with the necessary financial education and knowledge so that they may better elevate their lives, pursue ideal financial goals, and hopefully reach them.

Ultimately, retirement is a personal decision that only you should have a final say on. But simply deciding without any sound foundation is dangerous, not to mention risky.

That’s why in this blog, we are going to talk about the different types of retirement accounts and provide you with the essential foundations to help you decide for yourself which retirement plan suits you best.

 

What Are the Different Types of Retirement Plans?

According to the Internal Revenue Service, there are 12 retirement plans available to you. These are the following:

  • Individual Retirement Arrangements or IRAs
  • Roth IRAs
  • Simplified Employee Pension or SEP Plans
  • Savings Incentive Match Plans for Employees or SIMPLE IRA Plans
  • Payroll Deduction IRAs
  • 401(k) Retirement Plan
  • 403(b) Retirement Plan
  • 457 Plans
  • Profit-Sharing Plans
  • Money Purchase Plans
  • Employee Stock Ownership Plans or ESOPs
  • Defined Benefit Plans

Let’s go over these plans slowly and in simple terms so as not to overwhelm you.

 

What is an IRA?

In general, the term Individual Retirement Account (or IRA) encompasses a wide range of other plans and an even wider range of financial products.

So, when we mention an IRA, we’re simply referring to savings and investments for retirement, broadly.

As a plan, the IRA includes:

  • Traditional IRAs
  • Roth IRAs
  • SIMPLE IRAs
  • SEP IRAs

As a package, IRAs can include:

  • Stocks
  • Bonds
  • Exchange-traded funds
  • Mutual funds

 

Traditional IRA

The more common IRA, that most are probably familiar with, however, is the Traditional IRA.

 

A Traditional IRA is a tax-deductible plan which works by simply making contributions every year into the IRA.

 

For every contribution, your taxable income decreases, mostly depending on the amount of your contribution.

However, do note that when you withdraw money from the plan during retirement, these withdrawals will come with a tax in the rate of an ordinary income tax rate.

By the time you reach the age of 72, you will need to follow a required minimum distribution (RMD), the basis of which will be the retirement account size and your life expectancy.

Failing to follow this RMD may net you a tax penalty of more than 50%, so be wary!

 

Roth IRA

Roth IRAs are about the opposite of a Traditional IRA. In essence, ROTH IRAs are not tax-deductible, considering that your contributions are sourced from your after-tax dollars.

 

SEP IRA

This IRA Plan is for those who are self-employed, such as:

  • Freelancers
  • Small business owners
  • Independent contractors

The taxation principles of a SEP IRA follow that of a Traditional IRA in that it is tax-deductible, but is, likewise, taxed during withdrawals during retirement.

For the most part, SEP IRAs are set up by small business owners for their employees. Under this plan, however, employees are not allowed to contribute to their respective accounts, the same being limited to the employer on their behalf only.

 

SIMPLE IRA

Similar to the SEP IRA, the SIMPLE IRA is intended for small business owners and self-employed individuals. The only difference it has with the SEP IRA is that employees are no longer barred from making contributions to their accounts.

In an ideal situation, both employer and employee make contributions to their SIMPLE IRA plan.

Doing so potentially pushes both the business and the employee into a lower tax bracket, considering that the SIMPLE IRA, like the SEP IRA, follows the taxation protocols of a Traditional IRA.

 

Payroll Deduction Plan

As its name suggests, a Payroll Deduction Plan refers to a plan where an employer deducts or withholds money from an employee’s salary for various agreed purposes, such as healthcare or for retirement.

In a way, a Payroll Deduction Plan can also be an IRA or a 401(k) plan, in and of itself.

 

What Is the Best IRA Plan for Me?

Obviously, each IRA plan has its advantages. Each plan also has imposed limits and contribution requirements. Ultimately, knowing which plan suits you would depend on your:

  • Annual income
  • Job status
  • Age and among other things

Of course, at the end of the day, consulting a finance professional could be your best option.

Reach out to us today and we will gladly have one of our experienced financial advisors help you go through your questions about these IRAs.

 

What Is a 401(k) Plan?

A 401(k) Plan is an employer-sponsored plan in which a certain percentage of an employee’s salary, as provided by an employer, is automatically deducted from each paycheck and is automatically invested in the 401(k) account.

  • Joint contributions - a 401(k) plan can also be jointly-contributed to by both the employer and the employee. This is not, however, to be confused with a 401(k)-pension plan, which is a plan where an employer provides a specific amount of money to its employee in set periods.
  • Ability to choose investments - What makes the 401(k)-plan special, however, is that it allows an employee a certain level of discretion when it comes to choosing the specific investments that will comprise their 401(k) accounts. This means that a typical 401(k) plan can be an assortment of stocks, bonds, and mutual funds, among other instruments.

 

Arguably, a 401(k) seems to be the most well-known and popular retirement plan for most, considering that it not only allows the employee to decide what will comprise the plan but employers can also directly contribute to the growth of the account.

 

This, therefore, has created a mutually-beneficial situation for both employers and employees, giving rise to the prevalence of the plan, itself. 

 

What Is the 403(b) Plan?

The 403(b) Plan is similar to the 401(k) save for the fact that the former refers more to public school employees, tax-exempt organizations, or government employees, in general.

In some cases, employees may even set up both accounts concurrently should they decide to.

 

What is a 457 Plan?

Like the 401(k) and 403(b) plans, the 457 plan is a retirement plan that is quite similar to both, except that this particular plan applies to state and local public or government employees, including some non-profit organizations or charities.

 

What Is a Profit-Sharing Plan?

In simple terms, a profit-sharing plan is a type of plan that grants employees a share in the profits of the company.

How this is set-up and arranged, of course, would very much depend on the company and its own internal rules and processes.

 

Money Purchase Pension Plan?

A Money Purchase Pension Plan is a sort of variation of a Profit-Sharing Plan in that it is less rigid, considering that it can adjust itself based on the growth or movement of the company’s profit levels.

 

Typically, this plan works by having the employer deposit a set percentage of the employee’s salary to an account every year.

 

The employee has a choice on how to invest this money based on a list of options that the employer, itself, may provide.

 

Employee Stock Ownership Plan

The Employee Stock Ownership Plan (or ESOP) is a type of retirement plan that gives an employee stock ownership interest in the company that may either be sponsoring them or are selling shares.

This plan offers a variety of tax benefits and, as such, is often used as part of a company’s internal strategies and decision-making.

 

Defined-Benefit Plan

A Defined-Benefit Plan is a type of plan that is typically managed by an employer. This plan works by having the employer adopt a specific computation or formula that therein considers several factors, such as the employee’s length of employment, salary, and so forth.

Considering that a formula is used by the employer, the benefit to be paid out after a certain period of time is already determined. However, the final payout would depend on the returns of the investment.

In the event that the investment by the company was faulty or poor, then the employer is legally obligated to make up for the difference between the predetermined benefit and the shortfall.

 

So, Which Plan Is Best for Me?

There’s no clear-cut answer at this point in time. All of the above plans have their own advantages and disadvantages, and choosing which is the best fit for you would ultimately depend on several factors, including:

  • Risk profile
  • Finance knowledge
  • Investment knowledge
  • Work history
  • Salary history
  • Date of expected or planned retirement
  • Nature of the retirement you desire

All in all, however, you can break down these plans into three distinct categories:

  • Self-employed
  • Privately-employed
  • Publicly-employed

From there, you can opt to choose and discuss your plan with your employer, as well as study the investments that you intend to purchase.

 

How Can 121 Financial Credit Union Help Me?

We pride ourselves on having catered to people from varying walks of life. Whether your plan limit is $500 or $5,000, our experienced representatives will sit down with you and patiently discuss with you the best personal financial plans that may be available to you.

Our members enjoy complimentary, no-obligation financial planning. As we sit down and help you create the best plan for your early retirement or future, know full well that you are under no obligation to either contract with us or pay us for the assistance.

Here at 121 Financial Credit Union, our goal is to elevate your life by giving you greater financial freedom. We believe that by doing so, we can not only make the world a better place, but we can also help people uplift their lives so that they may live them to their fullest potential.

 

What Are Some of Your Products and Services?

We offer consultation and services on the following key areas:

  • Insurance Strategy: Some retirement plans can be divested into insurance investment and we can teach you how.
  • Investment Strategy: We can have this bundled with your retirement plan so that you can maximize your retirement payouts at a period of time that you most desire.
  • Retirement Planning: Every retirement plan can be customized and our experienced representatives can help you find the best plan for you.

Call us today to learn more. We’re here for you!

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