Choosing the right retirement plan for your business or individual needs is never easy. There are so many options. Plus, the plan characteristics are always being modified and adjusted. This is done for the changing needs of retirees and the economy.
We hope the plan summaries listed below can serve as a starting ground for this difficult, and sometimes confusing, decision.
Let us help you think through your options so that you will achieve the maximum benefit.
Traditional 401ks are retirement plans in which employees are encouraged to make pre-tax contributions. Some employers provide matching funds to the employee’s 401K account … as part of their benefits package. In some 401K plans, the employees have the option of selecting from specific investment options. Contributing to a 401K helps you plan for your retirement while reducing your taxable income.
Roth 401ks combine features of the traditional 401k with those of the Roth IRA. It differs from the traditional 401k in that contributions are made with after-tax dollars, so the participant’s taxable income is in no way reduced for the contribution made. The upside of missing the upfront tax-deduction is that the Roth 401k account will grow tax-free, and withdrawals taken during retirement will not be subject to income tax as long as the participant is at least age 59 1/2 and the account has been open for five years or more.
A new breed of the 401k recently introduced by a lot of investment companies is the self-employed or individual 401k plan. These plans are easy to install and have the lowest administrative costs possible to individual retirement plan participants. A huge selling point of these plans to a large portion of the self-employed community is the built-in loan provisions that give small business owners the ability to borrow from the plan, tax-free and penalty free. These individual 401k plans are being advertised and promoted by most big investment houses under different trademarked names like solo 401k, uni-k plan, and personal(k).
This type of IRA is best suited for business owners who do not want to be required to contribute to retirement every single year due to profit volatility or cash flow fluctuations. If contributing in a year, the employer must be willing to contribute for all eligible employees without discretion. Eligible employees are those age 21 and over, working for the employer in any three of the preceding five year period, and earning a certain dollar amount for the year. The employee does not make contributions in this type of plan.
This IRA, as the name suggests, carries an easily understood retirement premise. Employers that are looking to encourage employee participation in retirement … and reward participating employees through matching contributions … are best suited for this plan. Employees can contribute a maximum annual amount, and employers are usually required to match 3% of participating employee wages – or can opt to make 2% contributions for all employees (participating and non-participating).
Traditional & Roth IRAs
Employees who find themselves working for an employer without a retirement plan option can utilize a Traditional IRA to save for their retirement … as well as reduce their taxable income. Individuals can contribute to a Traditional IRA account and reduce their taxable income by the amount contributed. If individuals contribute instead to a Roth IRA account, the contributions are not tax-deferred; the withdrawals at retirement, however, are tax free. Roth IRA annual contribution limits are the same as Traditional IRAs.
In addition to the options above, employers will sometimes offer pension and profit-sharing plans, defined benefit pension plans, and money purchase plans. There are new retirement options popping up each and every year. We continue to evaluate our client’s needs in the midst of these changes to ensure they are always implementing and participating in the plans best suited for them.