Exploring various retirement savings accounts can make a dramatic difference to how much money you have after you retire. Both traditional and Roth IRAs provide tax breaks, with withdrawals not becoming taxable once you reach age 59 1/2 and meet certain requirements.
Self-employed individuals should also consider opening an IRA. Which type of IRA best meets their income and financial goals will vary.
Non-employer-sponsored plans
Occupant-sponsored retirement plans may be familiar, but other methods exist for saving for retirement such as Individual Retirement Accounts (IRAs), Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employers (SIMPLE) IRAs – plans which enable employees to contribute on tax-deferred basis and offer multiple investment choices.
Furthermore, they help overcome behavioral obstacles to savings such as bounded rationality (people don’t know the amount they should save); procrastination; status quo bias and loss aversion (where losses weigh more heavily than gains).
Non-employer-sponsored retirement vehicles offer the additional advantage of being portable and flexible. A SEP IRA, for instance, is ideal for self-employed individuals and one-person businesses alike as it allows higher contribution limits than traditional IRAs and a full selection of investment choices without payroll deductions required to set it up easily. Employee stock ownership plans (ESOPs) also present employees with an incentive to work hard.
IRAs
Individual Retirement Accounts (IRAs) are accounts provided by financial institutions and brokerage firms that offer tax breaks on investments, which make them attractive to both individuals and small business owners alike. Used primarily to save for retirement or supplement existing employer plans, IRAs may invest in stocks, bonds, mutual funds or alternative assets like private placements or tax liens.
IRAs can be particularly useful tools for the 33% of workers without access to workplace-based retirement plans such as 401(k). There are various types of IRAs available, including traditional, Savings Incentive Match Plan for Employees (SIMPLE), and Simplified Employee Pension (SEP).
IRAs can be opened with banks, investment firms, or brokers and used to invest in stocks, bonds and other assets – though fees should be taken into consideration as these could reduce returns over time. An alternative option would be using an automated robo-advisor service like Wealthfront as your manager of your IRA.
401(k)s
Starting out in the workforce may make saving for retirement seem like an unrealistic goal; you likely have more immediate concerns like student loans and competitive job markets to address first. By taking the necessary steps now to grow your wealth over time and provide yourself with more funds at retirement time.
Start saving now by taking advantage of your employer’s 401(k) plan. Many employers offer matching contributions, which serves as an extra incentive to save. Plus, if your employer provides Roth 401(k), this allows for after-tax dollars that provide tax-free withdrawals upon retirement.
Your 401(k) account may only offer a limited selection of stocks and bonds, which is likely for the best. Too many options can cause investors to become overwhelmed, hindering returns. In some plans, there is even the option to convert retirement savings into an annuity for immediate income streams.
Guaranteed income annuities
Guaranteed Income Annuities can help bridge the gap between planned savings and cost of living in retirement. They offer tax advantages and lifetime income with deferred payments that compound growth over time. They come in different varieties such as fixed annuity or deferred income annuity options with immediate or deferred payments beginning within 12 months; or deferred annuities starting payments later on in life.
Use pre-tax money from an IRA or workplace retirement plan to invest in an income annuity can protect savings in times of market downturn while offering guaranteed income during retirement. An annuity such as this one provides stability with potential growth potential as well as protection from inflation; additionally it guarantees at least some minimum monthly payments that may rise or decline depending on how the investments perform over time.
