Retirement Planning – Just the Basics

by Jonyce Bullock, CPA

Most people often don’t give much thought about saving for the future. Or they have given it a lot of thought, but haven’t known where to start so those thoughts have not yet become action. They haven’t decided which path to take because planning for the future can be overwhelming, intimidating, and tedious. If you haven’t begun thinking about retirement options, now is the time to start.

Choosing Which Plan is Best for You

While there are a number of retirement plan options available to us today and it can be overwhelming at times, let’s keep it simple. If you have a 401(k) or similar plan offered by an employer that is where you need to start. Period. End of discussion. This is mainly for one simple reason; it’s important to contribute enough to get any free money you are able to offered by your employer via the company match. Additionally many employer plans either cover or greatly reduce the investment fees for you, which is another way to turn your retirement plan contributions into free money for you. The bottom line here is that if you have an employer sponsored plan you should start right away by making sure you are contributing at least enough to enjoy full participation in any employer matching funds available. If you’ve maxed out your 401(k) or you don’t have a retirement plan at work, then you can consider an IRA or if you are self-employed a self-employed retirement option.

401(k)s and Other Employer-Sponsored Retirement Plans

Workplace retirement plans can be a huge blessing to many people. The most popular form of workplace retirement plan is a defined contribution plan. The best words you can read are “company match” while going through your benefits paperwork. This means that you have an employer-sponsored retirement plan in which the company contributes to your account based on your personal contribution level.

401(k)s are extremely easy to set up and maintain, which makes them a very good choice. There’s also a good chance you’ll receive free money because your employer will match a portion of your contribution. You decide how much to contribute to the plan and how to invest it. If you leave the company, your money comes with you no matter how long you’ve worked there.

Pros and Cons of IRAs

A huge advantage of IRAs is that they put you in control. You can choose the bank or brokerage and make all of the investment decisions yourself, or hire someone to make them for you. They also provide a much wider range of investment choices than typical workplace retirement plans do. Traditional IRA accounts have another major benefit, namely your contributions are deductible from your income that is liable to taxes. Thus, you pay fewer taxes during the year, which is always a plus. Roth IRA accounts, while not tax deductible grow 100% tax free, which also can result in significant tax savings over time.

However, there are some disadvantages to IRAs as well. IRAs have lower annual contribution limits than most workplace retirement accounts. The amount you can invest in an IRA account is not limitless, so you should check the contribution limits that the IRS establishes from time to time. Roth IRA contribution limits are based on your modified adjusted gross income, and the amount you’re allowed to contribute begins to decrease when you have a larger income.

Retirement Plans for Small-Business Owners and Self-Employed Individuals

Being self-employed definitely has its up-sides. Plans for contractors, the self-employed, and small business owners have high contribution limits than most employer plans and IRAs. These plans include SEP IRAs, Simple IRAs and a solo 401K. Most of these plans are also very easy to set up, which will make your life much less difficult.  These plans also often give you additional time to make your contributions, rather than December 31st, most of these plans allow you to make a contribution up until you file your tax return. Each type of plan has its own pros and cons and one may work better for your business than another so it is important to talk with your CPA and trusted financial advisor about what will work best for your business.

The Bottom Line

This post does not even come close to explaining all of your retirement options, but hopefully it gives you a good general overview and plants a seed of confidence so you can begin asking questions and deciding what is right for you. The most important part of retirement planning is starting: take that first step! As Nike says “Just Do It”! In future posts we will explore the various options in more detail. What questions do you have about retirement plans, or even retirement planning in general.

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