Some of the main reasons for people not starting to save early for their retirement are because it always seems far off, and bending your head around the alphabet soup of retirement accounts is a distasteful task. Unfortunately, even when most people need to understand and be responsible for their retirement planning, high schools and colleges do not educate students on the importance of retirement planning and how to use the various retirement savings plans. A brief guide to the maze of retirement savings accounts:
If Your Employer Is a For-Profit Organization
Your employer will likely offer a workplace retirement plan, typically a 401(k) plan. You can enroll whenever you like during your employment. Your employer will deduct the specified amount from your paycheck every month and deposit it with a retirement savings company.
Your employer may even offer to match your savings to a certain limit. Offers differ from one company to another, but whatever it is you should not pass it up because it is essentially free money. The amount of money you can save in a 401(k) varies from year to year. For example, the contribution limits in 2022 were $20,500, while for 2023; it is $22,500 for people under 50. An advantage of saving in a 401(k) is you do not pay tax on your savings but will need to pay when you withdraw the money after retiring.
If Your Employer Is a Nonprofit Organization
You can get various options of retirement accounts like 401(k), 403(b), and 457 plans if you work in a government organization or a nonprofit like a religious organization, charity, school, etc. Your savings will usually be invested in an annuity, not a mutual fund. However, often annuities have larger fees.
If You Are Self-Employed or If Employer Does Not Offer a Plan
When you need to set up a retirement account by yourself, you should approach a bank or a financial institution, and ask them about Solo 401(k), SEP, IRA, and Roth IRA plans. According to Nerd Wallet, self-employed people with no employees can use a Solo 401(k) plan.
Before signing on, you should ask them to provide you with details regarding their fees, including fees for account maintenance. The federal government limits the maximum amount you can save in an IRA account each year as per Chiang Rai Times.
Depending on how much you earn, the government may allow you to get a tax deduction for your IRA contributions subject to a specified limit every year. You can save more without the tax benefit. You don’t need to pay tax on your contributions when investing but become liable for tax only when withdrawing the amount. With a Roth IRA, you do not pay taxes when withdrawing because you pay the tax upfront. You may also consider saving in a Solo 401(k) plan, specially devised for the self-employed, as it allows you to save more than a traditional IRA but is subject to its own rules.
While you have many options for saving for retirement, the trick is to consult your accountant or professional tax planner and start saving as soon as you can.