Retirement Account Overview…

There are so many different retirement accounts it is hard to even know where to start and what options are available to you. There are fifteen different IRS: Types of Retirement Plans and the nuances underneath each type are tricky to navigate. 

If you are employed, the first place to start is to find out what your employer offers. If you are unsure, ask the human resources department at your work. (Pro tip: you should always put the minimum amount in your 401(k) that your employer matches for free money.) Here are a few of the more typical options offered by employers:

• 401(k)
  • Elective contributions are excluded from the employee’s taxable income (note that some plans have Designated Roth deferrals and are taxed at the time of contribution).
  • Employers can contribute to employees’ accounts.
  • Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts noted above).
• Simple 401(k)

•  Under a SIMPLE 401(k) plan, an employee can elect to defer some compensation. But unlike a regular 401(k) plan, you the employer must make either:
  • A matching contribution up to 3% of each employee’s pay, or
  • A non-elective contribution of 2% of each eligible employee’s pay.
• No other contributions can be made. The employees are totally vested in any and all contributions.

• Simple IRA (Savings Incentive Match Plan for Employees)

• The employer is required to contribute each year either a: 

• Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or
• 2% nonelective contribution for each eligible employee 

• Under the “nonelective” contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual limit of $290,000 for 2021; $285,000 for 2020 (subject to cost-of-living adjustments in later years)

• Employees may elect to contribute
• The employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money

If you (or your spouse) have taxable income and either your employer doesn’t offer a retirement plan or you want to save more (Note: The most you can contribute to your traditional and Roth IRAs for 2021 is the smaller of $6,000 or if you’re are 50 years or older $7,000 by the end of the year; or your taxable compensation for the year.) Look at one of the following options:

• Traditional IRA
  • Contributions are tax-deductible if you qualify.
  • You must start taking distributions by April 1 following the year in which you turn age 72 (70 1/2 if you reach the age of 70 ½ before January 1, 2020) and by December 31 of later years.
  • Withdrawals and any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.

• Roth IRA
  • Your contributions are not deductible.
  •  Minimum distributions are not required.
  • Withdrawals are not taxed on a qualified distribution. Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.

Work for a Government/non-profit/other entity? Look for:

• 403(b)
  • Similar to a 401(k) offered by public schools/501(c)(3) charitable entities/churches

• 457 deferred compensation plans
  • Typically offered by state or local government agencies
  • Employers or employees can contribute up to $19,500 in 2021.
  • Contributions are tax-deferred
  • Earnings on revenue are tax-deferred

Planning for retirement is important to do, particularly as you fly solo. There are many more nuanced options that could be available to you. Consult a financial professional to understand what is available to you and how to best optimize your options.