Whether you are a full-time employee or a self-employees business owner if you want to have your dream retirement lifestyle, saving for retirement should be a component of your overall financial portfolio and wealth building strategy.
That being said, there are a variety of different retirement savings plans that you can leverage for your retirement financial goals whether you are employed full time or own your own business. Let's discuss them below!
Retirement savings account types
This is an employer-sponsored retirement savings account into which you can contribute part of your income pre-tax. There is however, an annual cap on how much you can contribute. Many employers who offer the 401(k) plan will offer a match up to a certain percentage which does not count towards your annual cap.
The great thing about the 401(k) plan is that you get to save the maximum amount of your income because it contributed before taxes but keep in mind that when you retire, your funds will be taxed at whatever your tax bracket is at the time. So planning for taxes is a must.
Note: In addition to the traditional 401k, many employers offer a ROTH 401k to their employees. It works the same way a ROTH IRA way does (see below), as described below, but the main difference is the contribution maximum is much higher and similar in terms of the amount to that of the traditional 401k.
403(b) & 457 (b) Plans
These plan types are almost identical to the 401(k) plan but are offered to people who work as educators or in non-profit organizations - the 403(b), or who work for the government - the 457(b).
This is a type of retirement savings account that you can set up individually, independent of an employer. This account type is tax-deferred which means you will have to pay taxes come retirement (age 59 1/2) when you start to withdraw your money.
Having your taxes deferred is actually a good thing because it means that all your earnings and dividends have the opportunity to compound which will grow your total balance much faster than if you were having taxes taken out upon contributing to the account. IRA contributions limits, however, are much lower than 401(k) and if you make a withdrawal before you are eligible (age 59 1/2) you will be subject to income tax and a 10% penalty.
This savings account type is similar to a traditional IRA but has some key differences - 1) Your contributions are made post-tax, which means there is no deferred tax benefit but 2) the earnings on your contributions will not be taxed come retirement age and 3) you can make withdrawals on your contributions before you are eligible without any tax penalties.
Other types of IRAs
There are also other IRA types like the Simple IRA and the SEP IRA which are setup up similarly to the traditional IRA but with specific requirements:
- The Simple IRA (AKA Savings Incentive Match for Employees) is one that is used by small business employers, sole proprietors or partnerships to provide their employees with retirement savings benefits and works very similarly to a 401(k) savings plan.
- The SEP (AKA Simplified Employee Pension) is used by business owners to provide retirement savings benefits for themselves by allowing them to contribute to their own retirement account.
Things to note
- With the various retirement plans, your money becomes eligible for withdrawal at age 59 1/2. Early withdrawals can result in severe penalties. In addition, you will also have to pay income tax on withdrawals from tax-deferred plans.
- You are allowed to have an IRA account in addition to your employer-sponsored retirement accounts.
- You can find out about 401(k) contribution limits on the IRS website HERE and IRA contribution limits also on the IRS website HERE.