Saving for retirement is a fundamental aspect of financial planning and helps you work toward a secure and comfortable future.
A significant number of individuals use employer retirement benefits, such as 401(k) plans, to set aside income for retirement. This can be a great option, but it isn’t available to everyone. In a study from the ADP Research Institute®, approximately 50% of employers surveyed offered a retirement plan as part of their employee benefits package. Individuals who are self-employed will also need to explore other options to save for retirement.
If you don’t have access to an employer-sponsored retirement plan, don’t worry. You can still take charge of your financial future.
Here are some of the options available to save for your retirement:
Individual Retirement Account (IRA)
As the name implies, an individual retirement account (IRA) is tied to an individual, not to a company. Like 401(k) plans, these accounts offer tax-advantaged status and allow you to grow your money over time.
There are two main types of IRAs:
- With a Roth IRA, you pay taxes at the time you contribute to the plan. This means that when it’s time to start withdrawing from the account, distributions are tax-free. There is an income limit for Roth IRAs, which is set by the Internal Revenue Service (IRS). As of 2023, this limit is $228,000 for a married couple for $153,000 for a single individual.
- With a Traditional IRA, your contributions are tax-deductible. You pay taxes on withdrawals based on your income bracket at that time.
Both Roth and traditional IRAs have rules for when you can withdraw money. Typically, you’ll pay a penalty if you take any distributions prior to age 59 ½.
These accounts can be a valuable tool for saving for retirement. However, the primary drawback for IRAs is that there is a low annual contribution limit. As of 2023, this is set at $6,500 for individuals below age 50 and $7,500 for individuals who are 50 or older.
Simplified Employee Pension (SEP) IRA
Depending on your circumstances, you may qualify for a simplified employee pension (SEP) IRA. These are available to self-employed individuals, freelancers, and contract workers. Investment and distribution rules for SEP IRAs are similar to traditional IRAs.
A brokerage account, also known as a traditional taxable investment account, consists of a portfolio of assets such as stocks, bonds, and mutual funds. There are limited tax benefits to these accounts, but they offer a great deal of flexibility and fewer limitations than other account types. You have the option to choose which assets you prefer to invest in, and there are typically no limits to how much you can contribute to the account.
Liquidity is one of the primary benefits of brokerage accounts for retirement savings. You can choose to withdraw money at any time without a penalty, so you don’t need to use the funds exclusively for retirement.
If you own a business where you are the sole employee (or where you and your spouse are the only two employees), a solo 401(k), also known as a one-participant 401(k), could be an option for you. This operates similarly to a 401(k) plan for employees, and you are able to make contributions as an individual “employee” and as an “employer,” both of which offer tax benefits.
Choosing The Best Retirement Account(s) For Your Needs
How do you know what type(s) of account(s) to set up when planning for retirement? It’s important to consider all of the variables, such as liquidity, contribution limits, tax benefits, et cetera. In many cases, combining account types is a great option. Every household has different financial circumstances, and your retirement plan should be personalized to your goals, needs, and preferences.
Get Help With Retirement Planning
Working with an experienced financial advisor, such as those at Wellspring, helps demystify the process of planning and saving for retirement. We can answer your questions and give personalized support.
To learn more about how we can help you plan for retirement, or any other financial goals you have, contact us today.
Wellspring Financial Partners, LLC does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.