When it comes to retirement savings, a 401(k) is often the first account that comes to mind. And though an employee-sponsored 401(k) does come with many fantastic benefits, it is also far from the only option for those looking to save for retirement. Whether your employer doesn’t offer a 401(k) or you are self-employed, you still have tax-advantaged retirement savings options. If you have no 401(k), learn more about your retirement options below.
If you’re looking for assistance in creating a personalized financial plan, speak with a CERTIFIED FINANCIAL PLANNER™ professional at Good Life Financial Advisors of NOVA today!
A popular option for those without a 401(k) is an Individual Retirement Account (IRA). There are two main types of IRAs: traditional IRAs and Roth IRAs. Both traditional and Roth IRAs offer a great deal of investment flexibility on what can be held within the accounts. Additionally, both offer the ability to roll over unlimited amounts from previous employer plans.
For example, you are able to roll 401(k) plans from your former employer into a traditional IRA regardless of your income. However, IRAs and Roth IRAs do have their own sets of rules and limitations. With the recent passage of the SECURE Act, some of the rules have changed. It is important that you understand how those changes will impact you.
The main difference between the two is that traditional IRA contributions are pre-tax, thus potentially reducing your taxable income. Roth IRA contributions, on the other hand, are after-tax. Roth IRAs also differ from traditional IRAs because they have a bit more withdrawal flexibility, since withdrawals are tax-free. Withdrawals can also be made penalty-free for first time home buyers and in certain cases of disability.
As of 2020, you can contribute up to $6,000 per year to an IRA, unless you’re over 50, in which case you can contribute an extra $1,000, per year. Once you reach 59 ½ you can withdraw money penalty-free, but you will still have to pay income tax on the withdrawal. Further, high-income earners may not be able to deduct their traditional IRA contributions from their income tax. Also, higher-income earners may not be eligible to contribute to Roth IRAs due to income phaseouts. While the contribution limit for IRAs is fairly low, they are an excellent option for many individuals.
SEP is short for Simplified Employee Pension plan. A SEP IRA can be a great option for self-employed individuals. In order to open a SEP IRA, you must be a sole proprietor, partnership, S-corporation, or C-corporation. You’re eligible for a SEP IRA even if you have a full-time job in addition to your own business.
The contribution limits for a SEP IRA vary based on your income, but the contribution limits are typically much higher than they are for traditional or Roth IRA accounts. If you choose to set up a SEP IRA for yourself and you have employees, you must also set up a SEP IRA for your employees in most cases. You must also contribute the same percentage to your employee’s accounts that you contribute to your own SEP IRA account. There are exceptions to this, but further discussion is beyond the scope of this post. However, one feature that makes a SEP IRA stand out is the simplicity of setting one up. Typically, there are no tax forms to fill out, and maintenance is typically inexpensive.
A solo 401(k), also known as a self-employed 401(k), is a retirement savings account for those who are self-employed or own a business with no employees. One of the great things about a solo 401(k) is that you can contribute as both the employer and employee.
As the employee, you can contribute 100% of your earned income up to the annual contribution limit. In 2020, this limit is $19,500 or $26,000 if you’re the age of 50 or older.
As the employer, in 2020, you can contribute up to 25% of your eligible earnings, as long as the combined contributions as both employee and employer don’t exceed $57,000.
A solo 401(k) can be a great option for self-employed individuals, but it can be a bit more complicated to set up and maintain compared to some other retirement savings vehicles. You should consider whether or not the benefits of this type of plan justify the additional complexities. If you need help evaluating your options, we’re here to help.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA offers tax-deferral and pretax contributions. Self-employed individuals and businesses with less than 100 employees are eligible for SIMPLE IRAs. Like a solo 401(k), with a SIMPLE IRA, you can contribute as both an employee and an employer.
As of 2020, as the employee, you can contribute up to $13,500, as long as the contribution is made from money earned that year. Those over the age of 50 can contribute an additional $3,000 per year. As the employer, you can choose between a 3% match or a 2% contribution that is non-elective.
With a SIMPLE IRA, there are no tax forms to file, which makes it an easy and inexpensive retirement saving plan option for small businesses. But an important note for those running small businesses is that contributions must be made to the plan, even if the business is not making a profit.
Seek Assistance from an Experienced Financial Advisor
If your employer does not offer a 401(k), you still need to plan for your retirement. The good news is that you still have plenty of options. If you have questions about which accounts are right for your unique financial circumstances, consider working with a CERTIFIED FINANCIAL PLANNER™ professional at Good Life Financial Advisors of NOVA today!