How you can best save for retirement varies depending on your job. There may be unique opportunities to save that are only available to people in your profession.
Retirement plans for most
Most people have heard of a 401k plan. It’s usually offered by your employer, with contributions taken pre-tax directly from your paycheck so there’s no hassle. You can contribute up to $18,000 to a 401k per year, or up to $24,000 if you’re over 50 (as of 2016). Many employers also offer some type of match program, which can help you grow your retirement savings even faster.
With a 401k, you have the option of purchasing investments such as mutual funds, stocks, bonds, and ETFs from a list selected by your employer. It’s a great way to have diversity in your retirement portfolio and potentially capitalize on long-term market growth. It’s easy to start saving for retirement with an employer-sponsored 401k and your account balance under the plan is easily transferrable if you move from one employer to another.
An Individual Retirement Account (IRA) is great for people whose employer doesn’t offer any type of retirement plan, or anyone that wants to save for retirement. IRAs allow you to purchase investments such as mutual funds, stocks, bonds, and ETFs. They also allow you the opportunity to grow the value of your account income tax-deferred.
You can contribute up to $5,500/year – or $6,500/year if you’re over 50 (as of 2016). It’s also important to know you can have an IRA in addition to a 401k, meaning you can save even more towards your retirement. However, you may not be able to deduct all of your IRA contributions if your income exceeds certain levels.
Retirement plans for freelancers
The One-participant 401k (also called an Individual 401k or Solo 401k) is for freelancers or business owners who do not have any full-time employees. It’s similar to an employer provided 401k in that your contribution and earnings there on grow income tax-deferred, and you generally only pay taxes when you take withdrawals. Where it differs is in how much you can contribute, and the fact that you don’t need an employer to provide one for you.
With a traditional employer-provided 401k you can only contribute up to $18,000/year before age 50. With a one-participant 401k you can make contributions from both the employer and employee side. That means your maximum contribution could be as high as $53,000/year before age 50 (as of 2016). Since there’s no matching possibility from an employer, it’s good to know your maximum contribution can be so high.
An IRA is also a great option for someone who does not have an employer to offer them a 401k. There is also potential opportunity to have an IRA in addition to a one-participant 401k. (See above for more about the IRA).
Retirement plan for small business owners
A SEP IRA (Simplified Employee Pension plan) is for self-employed people (sole proprietors or as a partner), with or without employees, no matter the size of the business. It allows you as the business owner to contribute to retirement savings for yourself as well as offer a retirement plan to your employees.
With this plan, the employer makes a uniform contribution for all eligible employees; meaning both owner and employee get the same contribution rate. Employees are not allowed to contribute to a SEP IRA.
A self-employed business owner without any employees may choose this over an Individual 401k (see above) because it has fewer administrative fees. Another difference to note is that you can’t contribute as much to a SEP IRA as to an Individual, nor can you take out a loan from your SEP IRA.
What makes this plan best for a small business owner is your ability to give your employees retirement benefits, meaning you’ll be able to include retirement benefits in any benefits package you afford your employees.
The Simple IRA is for business owners that have no more than 100 employees. As the owner, it allows you to save for retirement as well as offer retirement savings for your employees. All employees are required to be covered by the plan, which many potential employees will find very desirable.
Unlike the SEP IRA, with the Simple IRA both the employer and employee can contribute. Employers have two options for contribution plans: they can either match the employees’ contribution up to 3% of compensation, or make a fixed contribution based on 2% of the employee’s salary. The second option is considered a “non-elective” plan because the employer makes the 2% contribution even if the employee makes no contribution.
Retirement plan for teachers
The 403b plan is exclusively for teachers in public schools or tax-exempt private schools. Contributions are made on pre-tax income and can grow income tax-deferred. You can contribute up to $18,000 to a 403b plan per year, or up to $24,000 if you’re over 50 (as of 2016).
With the 403b, your employer may make matching contributions to the money you contribute. Another advantage is that you can choose your specific investments.
If you work in a public school district, you can supplement your retirement savings with a 457 plan set up by your organization. Typically, if your employer is a governmental entity, state or local law will determine who is eligible to participate. While maximum contributions are the same as a 403b, they are in addition to your original plan, meaning much more potential retirement savings each year.
Besides teachers, the 403b plan is also available to 501(c)(3) non-profit employers, cooperative hospitals, and self-employed ministers.
Get in touch with a Voya professional if you’d like to know more about which retirement plan is right for you.
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal advisor or financial professional for specific advice about your individual situation.
The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties.
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Neither Voya nor its affiliated companies or representatives provide tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.