Retirement may seem like a distant event when you’re young and full of energy, but it’s never too early to start thinking about your future. One crucial aspect of preparing for retirement is understanding the various types of retirement savings accounts available to you. Let’s explore the differences between popular accounts such as the 401(k), Roth IRA, Traditional IRA, SEP IRA, Solo 401(k), and 403(b). We will be happy to discuss your financial goals and help you choose the right plan. Contact your CPA today.
Let’s kick things off with the rock star of retirement savings. Offered by employers, a 401(k) allows you to contribute a portion of your pre-tax salary to an individual account, reducing your taxable income for the year. Some employers even match a percentage of your contributions, which is like free money! Keep in mind that when you withdraw from your 401(k) during retirement, those withdrawals will be taxed.
Ah, the Roth IRA, the cool cousin in the retirement savings account family. With a Roth IRA, you contribute after-tax income, meaning you’ve already paid taxes on the money you put in. The best part? Qualified withdrawals in retirement are tax-free! While contributions to a Roth IRA have income limits, it’s a good option if you expect to be in a higher tax bracket during retirement.
Next up, we have the tried-and-true method of saving for retirement. Similar to a 401(k), contributions to a traditional IRA are made with pre-tax income, reducing your current taxable income. You’ll only pay taxes when you withdraw the money in retirement. This account is perfect if you’re looking to lower your tax burden now and plan on being in a lower tax bracket later.
If you’re self-employed or a small business owner, the SEP IRA might be right up your alley. A SEP (Simplified Employee Pension) plan allows you to contribute a percentage of your business income to the account. The contribution limits are higher than a traditional IRA, giving you the potential to save more for retirement while enjoying the tax benefits. Just remember that contributions are deductible and withdrawals are taxed when you retire.
Similar to the SEP IRA, this is designed for self-employed individuals. It offers both employer and employee contributions, meaning you can contribute as both the business owner and the employee. This allows for higher contribution limits and greater flexibility in handling your retirement savings. Plus, you still get to enjoy the pre-tax benefits and tax-deferred growth until retirement.
Lastly, we have the 403(b) account, often referred to as a “tax-sheltered annuity.” These accounts are typically offered by non-profit organizations and public schools. Similar to a 401(k), contributions are made with pre-tax income, lowering your taxable income. The money grows tax-deferred until you retire, at which point withdrawals are taxed.
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Let’s work together to determine the best retirement savings option (or options) based on your individual circumstances:
- 401(k) Accounts
- Roth IRA
- Traditional IRA
- SEP IRA
- Solo 401(k)
- 403(b) Account
Regardless of which accounts you choose, the most important step is to start saving today, and let the magic of compound interest work its wonders for your future retirement!