Planning for your retirement can be overwhelming, and with it being so far in the future, it’s easy to put it off to another day. In fact, in a 2018 study by Northwestern Mutual, 21% of Americans have no money saved for retirement at all. If you’re part of the 21%, it may feel overwhelming to start, but it doesn’t have to be! Idaho Central is happy to help guide you through this important planning, and there are a few different accounts to consider.
What options do I have?
There are multiple options to consider, and we will review four options here, including 401K, Traditional IRA, Roth IRA, and SEP IRA.
When people think about retirement plans, a 401K is typically what their mind goes to first. You have most likely heard the term, but do you know what it is? A 401K is a qualified retirement plan that allows eligible employees of a company to save and invest for their own retirement on a tax-deferred, also known as pre-tax, basis. This means saving for retirement with earnings before getting taxed, and you will not need to pay taxes on the contributions until you withdraw them. For many people, this seems to be the easiest option, since it’s often what their employers offer, and this is deducted from their paycheck automatically.
There are limits on 401K accounts, however, which may not make this the best fit for you. For instance, 401K accounts must be established by an employer. This means that if your employer does not currently offer retirement benefits, but you are wanting to contribute to your retirement, you are not able to set up a 401K on your own. There are also limits on 401K contribution amounts. For 2020, the amount of income you can contribute to a 401K is $19,500, with a possible additional contribution of $6,500 if you’re age 50 or over. In some cases, your plan also may limit contributions to a lower amount. If a 401K does not meet all of your retirement saving goals, you may want to explore other options.
A traditional IRA is best if you want tax-deferred earnings and the possibility for tax-deductible contributions. This is the most common IRA. Established in 1975 with the Employee Retirement Income Security Act (ERISA), it has become known as a “regular” or Traditional IRA to distinguish it from a Roth IRA. Contributions to a Traditional IRA are pre-tax, making it similar to a 401K in that regard. Once you start withdrawing from your Traditional IRA, taxes would then be paid on the distributions. Anyone, regardless of income, can contribute to a traditional IRA.
For 2020, you can contribute up to the lesser of 100% of your earned income or $6,000. Once you reach age 50, contribution limits on IRAs increase by another $1,000. This allows for a “catch-up” contribution for those nearing retirement.
A Roth IRA is best if you want tax-free withdrawals. The Roth IRA was established by the Taxpayer Relief Act of 1997. This differs from a Traditional IRA in that it allows you to make contributions after tax, meaning that your contribution amount is taxed before you deposit it. You will be taxed at the time of earning, not at the time of pulling the money. Since you are paying tax on the contribution amount, all future qualified distributions are then tax-free. This includes any investment earning, your money grows tax-free! There are income limits on Roth IRAs to be aware of.
For 2020, you can contribute up to the lesser of 100% of your earned income or $6,000. Similar to the Traditional IRA, once you reach age 50, contribution limits on IRAs increase by another $1,000. This allows for a “catch-up” contribution for those nearing retirement. If you choose to have both a Traditional and Roth IRA, the contribution amount for both cannot total more than your annual contribution limit.
A SEP IRA is best if you are self-employed or own a small business and want to save for retirement. SEP stands for Simplified Employee Pension, and is a form of Traditional IRA. With that in mind, SEP IRA plans were created to meet the needs of small employers with few employees and limited resources. A SEP plan provides business owners with a simplified method to contribute towards their employee’s retirement as well as their own. A self-employed person can make SEP contributions to his or her own IRA. The purpose for a SEP is that they are easily established and maintained unlike traditional retirement plans.
How can Idaho Central help me?
Idaho Central is happy to answer any IRA questions you may have, and offer guidelines, such as a Roth IRA is better for those who will be in a higher tax bracket at retirement, while a Traditional IRA is better for members who will be in a lower tax bracket at retirement. However, when it comes to determining which IRA is the best option for your needs, Idaho Central recommends that members contact their Tax Advisor to determine whether you’re eligible and if it makes sense to contribute to a Traditional or Roth IRA and how much.
Idaho Central Credit Union aims to help our members achieve financial success, and believes that investing in an IRA is a great way to provide for your future financial needs. At Idaho Central we are proud to offer several individual retirement accounts, including Traditional, Roth, and SEP IRA plans with our IRA Share Savings, IRA Money Market Savings, and IRA CDs.