The Five Best Retirement Accounts To Use
November 23, 2020 (Investorideas.com Newswire) Why is choosing the right retirement savings plan so important for today? It used to be that the old pension plans and annuities were the standard for having your retirement all set, but times have changed since the early 20th century, and the baby boomer generation is living longer than their predecessors. With longer life spans, some people have put off their retirement dates till later, and they've realized they need their savings plans to last longer than they may have originally thought. For those reasons, it's important that you know what kind of retirement plans you should look into, and why you should.
Traditional And Roth 401k Plans And Their Advantages
Probably the most commonly known retirement plan is the 401k, an account that's setup by an employer for employees to have funds contributed to for as long as they work for the employer. The money is deducted from the employee's paycheck and placed into the investment account, and the employee then chooses what type of securities they want to invest it in. If the 401k plan is a traditional one, the contributions to it will be made before taxes are deducted from the paycheck, and the investment will grow tax-free. Taxes will then be applied upon withdrawal, which the employee can do once they reach age 59 1/2. If the 401k is a Roth 401k, the employee will be making contributions to it after taxes have been applied, and therefore withdrawing in retirement without any taxes occurring at that point.
- Annual contributions to a 401k can be up to $19,000 a year if you're under 50, and $25,000 a year if you're over
- Most of the investment setup work is done for you making things easier to manage
- There's usually also an option to borrow out of a 401k fund if there's an emergency provided you follow the rules for doing so
- Only a business can set up a 401k, not an individual
- They usually have administrative fees that are deducted from your funds
- You're often limited in the type of investments offered in a 401k
Traditional And Roth IRA Advantages
IRAs are some of the best retirement accounts to set up because usually just about anyone can do so. Now it used to be that certain banks or brokers would require thousands of dollars minimum to fund an IRA, but today there are many online investing platforms that allow you to open an IRA with practically no minimums. And like a 401k, you can open an IRA as either traditional IRA, or a Roth IRA if you qualify for that. With an IRA, you'll generally have even more control of your investment than a 401k.
- You can usually avoid the kind of administrative fees with an IRA that come with a 401k
- You have more investment choices, especially if you open a self-directed IRA
- You can also fund an IRA with a 401k rollover, a process of transferring 401k funds to an IRA
- Your contribution limits are lower at $6,000 while under age 50, and $7,000 if you're over
- There are income limits for opening a Roth IRA, or claiming tax deductions for a traditional IRA. According to SoFi Invest, "You might be able to lower your tax bill if you are eligible to make deductible contributions. Additionally, the money will grow tax-deferred, which can make a difference over a long period of time."
- Since you're generally on your own with managing an IRA, you'll want to do your research on your investments
Simplified Employee Pension Plans Benefits
If you're looking to make higher contributions to a retirement account, and you either own a small business or are self-employed, you might be able to open a simplified employee pension plan (SEP) account. This retirement plan allows you and any employees you have to contribute up to 25% of annual earnings, and the maximum amount it can reach is $56,000. A SEP can be easier to manage than a 401k for business owners, and with contribution limits generally higher than an IRA and sometimes a 401k, it offers a little more for investing. It is still more complex to setup than a regular IRA though.
Employee Stock Ownership Plan Benefits
For employers who are publicly traded companies, a retirement plan for employees could consist of employees becoming stakeholders in the company with their equity increasing over time. Most employers will set this up as a way to increase stock holdings based on an employee's pay grade. When an employee exits the company, their stock holdings can get cashed out at market value. This plan isn't too common though as it is expensive and takes a lot of legal knowledge to set up.
Using Tax Advantaged Investments In A Standard Brokerage Account
While you're encouraged to use specific retirement plans like a 401k or IRA, you can still use a standard brokerage account to build your retirement savings. Some investments are taxed higher than others, plus you can often save on taxes if you hold onto an investment long-term and get taxed at the lower capital gains rate. Some investments like municipal bonds have practically no tax rates, though it's not recommended to have large holdings of them in your portfolio. But by keeping some investments in a regular brokerage, you also have some liquidity to tap into.
At the end of the day, there are a lot of retirement options to consider, though depending on who you work for, they may not all be available. But put your funds in as many different accounts as possible, and keep in mind that investing is far more profitable when done in the long-term than making a lot of short-term trades. It's also good to constantly check your portfolio to make sure you're taking advantage of the best investment tools out there.
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