It’s never too early to start thinking about retirement. Planning now can help to alleviate potential headaches in the future.
A well-crafted guide to retirement and IRA options can help to set you on the path towards saving and investing in a secure, sustainable, and healthy financial future.
In this guide, you can begin to learn what some of the investment options are for retirement, how to save for retirement, and what an IRA account is.
Jump to:
- Standard 401(k) Plan
- Roth 401(k) Plan
- Standard 403(b) Plan
- Roth 403(b) Plan
- 457 Plan
- Thrift Savings Plan
- Defined-Benefit Plan
- Traditional IRA
- Roth IRA
- Spousal IRA
- Rollover IRA
- SEP IRA
- Solo 401(k) and Solo Roth 401(k)
- SIMPLE IRA
- Payroll Deduction IRA
- Profit Sharing Plan
Employer-Sponsored Retirement Plans
Standard 401(k) Plan
A basic and secure option, a 401(k) plan is an employer-sponsored retirement account.
Employees can make contributions to their 401(k)s by withholding a predetermined percentage of their paycheck each pay period.
In some cases, employers will match the employee contributions up to a specified limit.
It is beneficial for the account holder to increase contributions each year.
Annually increasing the percentage put into the 401(k) allows it to grow year after year.
There is an array of investment options associated with a 401(k). Account holders can invest in mutual funds, real estate investment trusts, exchange-traded funds, bonds, and stocks.
There are contribution limits based on age and annual income. For instance, according to the Internal Revenue Service (IRS),employees under age 50 in 2021 could not contribute more than $57,000 in one year to their 401(k)s.
Contributions to standard 401(k) plans are not taxed and can reduce the contributor’s income taxes, but withdrawals are taxed as ordinary income.
A standard 401(k) is recommended for those belonging to lower tax brackets.
Roth 401(k) Plan
Roth 401(k) plans are funded by taxed contributions. This is different from a traditional 401(k), which is funded by tax-free contributions.
Similar to traditional 401(k)s, contributions made to a Roth 401(k) account is subject to limitations based on the account-holder’s age and annual earnings.
For those with higher income tax rates, a Roth 401(k) plan is beneficial as withdrawals are tax-free once the terms and conditions of the policy have been met.
Tax-free withdrawals are known as qualified distributions.
To be considered a qualified distribution, the following criteria must be met:
- The account is held for at least five years
- The account holder is over 59 years of age
- Any withdrawal made due to a disability
- Any withdrawal made on or after the death of the account holder
Qualified distribution criteria and other 401(k)-related contribution conditions are regulated by the IRS.
Standard 403(b) Plan
Retirement accounts that are only available to specific fields of profession are known as a 403(b). These professions include:
- Public school employees (teachers, principals, administrators, etc.)
- Employees of tax-exempt organizations (non-profits, foundations, religious organizations, etc.)
- Government employees
- Healthcare workers and employees of cooperative hospital organizations (doctors, nurses, etc.)
There are a number of other professions that can qualify for a 403(b)-retirement account as outlined by the IRS.
Like 401(k)s, age and income affect the amount an account holder can contribute per year and the contributions aren’t immediately taxed.
In some situations, a 403(b) account will allow for immediate vesting. Vesting is when an employee earns full ownership of a company-sponsored asset, such as stock.
This is rarely allowed with 401(k)s.
Certain non-profits and government organizations allow those who have been employed with the institution for 15 years or more to make additional catch-up contributions to their 403(b) account.
This is typically sooner than when 401(k) account owners are allowed to make catch-up contributions.
Catch-up contributions are contributions made to a retirement account that exceed the normal limitations of the account. They are normally reserved for workers at or over 50 years of age.
However, under a 403(b) plan, employees need only work 15+ years before being eligible to make catchup contributions, regardless of their age.
Although 403(b) account holders have less investment options, they are permitted more catch-up contributions than those with a 401(k) account.
Investment options for a 403(b)-retirement account allows for fixed and variable mutual investment funds. Meaning, the options are not as diverse as plans offered to private sector employees.
Roth 403(b) Plan
Also known as a Roth designated account, a Roth 403(b) plan is similar to a Roth 401(k) plan, with some exceptions.
Roth 403(b) plans do not have income restrictions when it comes to making contributions.
A standard 403(b) plan can become a Roth 403(b) plan by appealing to the IRS.
457 Plan
A 457 plan is available to state and local government employees, public service employees, and some non-profits. This plan is similar to a 401(k), with a few differences.
Unlike a 401(k), 457 plans allow for more catch-up contributions. In 2021, the IRS stated employees nearing retirement could contribute up to $39,000.
With a typical 401(k), the IRS applies a 10% penalty on early withdrawals.
Individuals with a 457 plan will not encounter IRS-assessed early withdrawal penalties — unlike those who have a 401(k) plan.
But with 457 plans, all withdrawals are subject to normal taxation like those of a standard 401(k).
Professionals who qualify for a 457-retirement plan includes independent contractors, whereas they would not be eligible for a 401(k) account.
Thrift Savings Plan (TSP)
Thrift Savings Plans (TSP) are available to federal employees and those in the uniformed services, including the United States Air Force, Army, Marine Corps, and Navy.
The same contribution and withdrawal rules that apply to 401(k)s and Roth 401(k)s also apply to TSP and Roth TSP accounts.
TSPs have the same advantages as retirement plans offered by private companies and organizations.
One key difference, however, is TSP investment options are limited to six types of index funds:
- Government Securities Investment (G) Fund
- Fixed-Income Index Investment (F) Fund
- Common-Stock Index Investment (C) Fund
- Small-Capitalization Stock Index Investment (S) Fund
- International-Stock Index (I) Fund
- Life-Cycle (L) Fund
While TSP investment options are restricted to the index funds listed above, it is managed by a trust contracted by the Federal Retirement Thrift Investment Board (FRTIB).
As a result, the index funds are strictly managed and liability rests in the FRTIB rather than the individual.
Defined-Benefit Plan
With a defined-benefit plan, also known as a pension plan, employers offer employees certain benefits or payouts at the time of retirement.
Usually, the employer will formulate the benefit based on the employee’s age, years of service, and salary history. In other cases, employers will offer a fixed benefit.
Recommended for those with a long-term employment history at a single company, the employer is responsible for the financial management of the plan and investments, rather than the employee.
Although riskier, if a bad investment is made, the employer is legally responsible for paying back any finances lost on the bad investment.
Individual Retirement Accounts (IRAs)
An individual retirement account (IRA) is a plan established between the individual and a financial institution of the individual’s choice, such as a credit union, like HRCCU.
It is possible to have an IRA and an employee-sponsored retirement plan at the same time. This can double the earnings and investments saved towards retirement.
There are various types of IRA plans.
Traditional IRA
Traditional IRAs are funded, taxed, and face the same withdrawal rules as 401(k)s. It operates the same as a 401(k) with the only difference being how an IRA is administrated versus a 401(k).
IRAs are individually funded retirement plans while 401(k)s are employee-sponsored.
The stocks and bonds typically attached to traditional IRAs offered by banks are CDs (certificates of deposit) and savings accounts.
Roth IRA
Roth IRAs operate much the same as Roth 401(k)s, the one notable difference being income limitations.
Eligibility to open a Roth IRA depends on the annual modified adjusted gross income (MAGI) of the filer(s). This income limit can change on a yearly basis.
There is no income limit associated with a Roth IRA account. But it is possible for those with a Roth IRA to move funds to a Roth 401(k) tax-free.
This is a good option for those who’ve recently switched jobs or have an account under a previous employer.
Spousal IRA
A spousal IRA allows a working spouse to open and support an IRA in the name of a non-working spouse, or a spouse with a very low income.
Spousal IRA and spousal Roth IRA accounts operate the same as traditional or Roth IRAs.
The difference is spousal IRAs allow married couples with differing incomes to contribute or subsidize to the IRA account of the lower-income partner.
The working spouse’s income must be equal to the couple’s total IRA contributions. To open a spousal IRA, a couple must file a joint tax return. However, spousal IRAs cannot be held jointly.
Rollover IRA
Using a rollover IRA, an individual can move the funds from an employer-sponsored retirement plan of a previous employer into an IRA.
Doing this allows individuals to transfer accounts while maintaining the tax benefits of their retirement assets and avoiding early withdrawal penalties.
IRA rollovers are considered non-taxable transactions. The IRS cannot withhold the typical 20% of transferred assets under a rollover IRA.
There is also no limit to the amount an employee can rollover.
Rollover IRAs offer diverse investment options similar to those of private sector employee-sponsored retirement plans.
However, rollovers must be done within a limited amount of time — typically within 60 days of receiving an IRA or retirement plan distribution. And there are IRS-assessed penalties for late rollovers.
Retirement Plans for the Self-Employed
Small business owners may want to consider retirement plans that benefit the self-employed as well as their employees.
There are multiple retirement plans that are tailor-made for small businesses depending on a few factors, including the number of employees and business size.
Simplified Employee Pension Plan IRA
Simplified Employee Pension (SEP) IRAs are well-suited to self-employed entrepreneurs with few employees.
A type of traditional IRA, a SEP IRA is established and funded by the employer. In return, the employer receives tax benefits. An employer can set up a SEP IRA for themselves and act as sole proprietor.
The employer must make equal contributions to each employee’s plan, including their own. However, the contribution amount can change depending on the business’ cash flow.
The following conditions must be met for an employee to be eligible to participate in a SEP IRA.
- Worked with the employer at least three years within the last five years.
- Earned at least $600 within the year.
Employees cannot contribute to their plans via payroll deduction.
Maximum annual contributions can be higher with SEP IRAs.
But catchup contributions for workers 50 years of age or older are not permitted under a SEP IRA.
Solo 401(k) & Solo Roth 401(k)
Solo 401(k)s and solo Roth 401(k)s are recommended for a business owner without employees besides a spouse. There are no age or income restrictions to enroll in either plan.
A solo 401(k) and solo Roth 401(k) only covers the employer and a spouse, provided the spouse is also employed by the company.
The tax advantages for a solo 401(k) and solo Roth 401(k) are the same as their traditional contemporaries.
One key factor to note is the contribution limitations that apply to the employer and employee are combined when the provider of the retirement plan is also the holder.
In other words, self-employed people enrolled in a solo 401(k) or solo Roth 401(k) are subject to extra contribution limitations.
Solo 401(k)s and solo Roth 401(k)s are opened with the help of a broker. The process can be done online.
The broker will provide an Employer Identification Number and a plan adoption agreement to be filled out by the individual.
The investment options available through a solo 401(k) or solo Roth 401(k) are the same as their contemporaries.
Savings Incentive Match Plan for Employees IRA
Savings Incentive Match Plan for Employees (SIMPLE) IRAs are fitting for business owners employing upwards of 100 staff members.
SIMPLE IRAs are similar to traditional IRAs. Setup is simple, although employee contribution limits are lower.
The key advantage for employees is that employers are mandated to match their contributions.
There is no Roth IRA option for a SIMPLE IRA.
Payroll Deduction IRA
Good for the self-employed with one or more employees, payroll deduction IRAs are funded via employees’ payroll deductions.
A payroll deduction IRA operates like a 401(k) plan.
Payroll deduction IRAs are funded by employees’ automatic withholdings.
The investment options for payroll deduction IRAs are diverse and low-cost.
A key advantage of payroll deduction IRAs is the minimal administrative costs, making it much more affordable for employees and employers.
Payroll deduction IRAs are easy to maintain as employers do not need to file government documents, IRS documents, or annual reports for them.
Employers do not match or make contributions with a payroll deduction IRA.
Disadvantages to payroll deduction IRAs include low contribution limits compared to other retirement plans. In 2021, an enrollee’s contribution limits for their 401(k) were $19,500 per year.
In 2021, those with payroll deduction IRAs could only contribute $6,000 per year.
Consequently, building a sufficient retirement savings account via payroll deduction IRAs is more difficult.
Employers do not get tax deductions for providing payroll deduction IRAs since they do not contribute.
Employees also are not permitted to take out loans from payroll deduction IRAs during their employment as is the case with other retirement plans such as a 401(k).
Profit Sharing Plan
Profit sharing is another retirement plan option that is ideally suited for small business owners with one or more employees.
This type of retirement plan allows business owners to use the business’ earnings to fund employees’ retirement plans.
Under a profit-sharing plan, employees are entitled to a specific percentage of a company’s profits. The percentage shared with employees is up to the employer or company.
Employees can receive their share of the profits via cash, company stock, or direct contributions to their retirement funds.
The funds stored in a profit-sharing plan are tax-deferred and held to the same withdrawal rules as a 401(k).
However, unlike a 401(k) and other retirement plans, under a profit-sharing plan, employees are not allowed to take out loans from their retirement funds.
As profit sharing plans link employees to the company’s earnings, it can build employee loyalty and boost productivity.
However, if a company’s profits are suffering, the employees’ benefits also suffer and negatively impacts the employer.
Schedule an Appointment at HRCCU
Ensure your retirement and financial wellbeing with HRCCU.
HRCCU offers members great options for retirement, including IRA savings accounts and certificates. Each plan offers benefits that can fulfill the unique needs of our members.
To learn more about the retirement savings accounts and how to invest in your future, contact our financial experts today for a consultation.
