Kristina Storey's Blog: Are You Using the Right Retirement Savings Plan?

Wednesday, 28 February 2018

Are You Using the Right Retirement Savings Plan?

Americans have a variety of tools available to them to help them with their retirement savings. Each one is governed by a different set of regulations. Different plans also have different contribution limits.

If you’re a small-business owner, you might think you’re too busy to be thinking about retirement now. This could be especially true if you’re still young. However, it’s never too early to start planning for your declining years. Make sure you’re ready when the time comes. Do this by choosing a retirement savings plan that is right for you.

Why Are Retirement Savings Important?

Retirement savings are important for Americans because they are living longer. Most Americans expect to retire at about age 66. However, the average age of death for most Americans is 79. As a result, most Americans can expect to have more than 13 years as retirees. Of course, you want to maintain the lifestyle you have become accustomed to in your working years. Therefore, retirement savings are a must.

Consider Your Options

Your options for retirement savings are numerous. They include individual retirement accounts (IRAs), Roth IRAs, 401(k) plans, and hybrid Roth 401(k) plans. In addition, self-employed people can choose simplified employee pension accounts. It’s important to understand a few details about each type of plan so you can choose the one that’s right for you.

Funds that you put away in a retirement savings account enjoy certain tax protections. In exchange, the accounts are governed by strict rules. You need to understand these rules in order to avoid fees and tax penalties. For example, if you withdraw your IRA funds before you reach retirement age, you will pay stiff penalties in most cases. However, if you’re withdrawing for a few approved purposes, you might be able to avoid those fees. Those approved purposes can include unpaid taxes and college costs.

Conversely, if you’re using an IRA or a 401(k) plan to save for retirement, you have to start taking the money out when you reach a specific age. Otherwise, plan administrators can charge you brutal fees of up to 50 percent. On the other hand, with a Roth IRA, you never need to withdraw the money at all.

There are specific retirement accounts for special circumstances, too. For instance, if your spouse doesn’t have any earned income but you file joint taxes, your spouse can open a Spousal IRA to save for retirement. Self-employed people and freelancers can open a simplified employee pension IRA. This lets them sock away up to 25 percent of their income for the future.