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There are many forms of retirement accounts that, depending on your situation, you may be able to take advantage of in your working years. In this blog, we wanted to discuss some of the most common ones, give you and understanding of who has access to each of them and show some of the features as well.
IRA
So let’s start with the Individual Retirement Account or for short, the IRA. The IRA, as the name suggests, is built for an individual to help them save for retirement. In order to contribute to an IRA, you have to have taxable income. There are two main types of IRA’s that you can open, one being a Traditional IRA and the other being a Roth IRA.
A traditional IRA allows you to make pre tax contributions that grow tax deferred and withdrawals are taxed at your current income level in retirement. The limit for contributions in 2024 are $7,000 with an additional $1,000 as a catch-up contribution if you are over the age of 50.
For a Roth IRA, you contribute to the account with after tax dollars but your earnings in the account grow tax free and withdrawals on the money in retirement, after age 59 ½ and assuming the account has been open for 5 years, are tax free as well. The contribution limit for a Roth IRA is the same as the traditional IRA for 2024.
A caveat to the Roth IRA is that there are income limits to the account.
Per the IRS website, in 2024 “the income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $146,000 and $161,000 for singles and heads of household, up from between $138,000 and $153,000. For married couples filing jointly, the income phase-out range is increased to between $230,000 and $240,000, up from between $218,000 and $228,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.”*
401(k) / 403(b)
The 401(k) and 403(b) are another form of retirement account however as opposed to an IRA, which anyone can open if they have earned income, a 401(k) or 403(b) are considered employer sponsored plans and can only be opened through them for that reason. The main difference between a 401(k) and 403(b) is that a 401(k) is administered through private institutions while 403(b)’s are designed for public employees.
As with the IRA, there are both Roth and Traditional 401(k)’s and 403(b)’s but the status of your plan may be dependent on how your employer has designed it. One key benefit that you should check with your plan is if your employer does any type of match to your contributions in the plan. There are some plans where employers will match a certain percentage of your contributions each year which can be a benefit to you overtime.
The contribution limits are also higher than those of an IRA. For the year 2024, you can contribute $23,000 to your 401(k) or 403(b) and if you are over the age of 50, you can add an additional $7,500 as a catch-up. If you switch jobs, you will no longer be able to contribute to your plan but there are multiple options that you have for that account to be able to continue to do so. These include rolling the funds over into your new employers retirement plan, if applicable, or rolling the money over into an IRA.
SEP IRA or Solo 401(k)
These accounts are geared towards those who are either self-employed or own a small business. The SEP IRA, which stands for Simplified Employee Pension Plan IRA, allows for you to contribute up to 25% of your income or $69,000, whichever is less, for the year 2024.
The contributions for a SEP IRA are completely funded by the employer and setting up this type of plan can be considered rather inexpensive and easier than when compared to a 401(k). One quick note about the SEP IRA is that it can only be contributed to as a traditional account, meaning that the contributions go in pre-tax and grow tax-deferred.
A solo 401(k) is a retirement account that is designed for those who are self employed with no employees. An interesting fact about the solo 401(k) is that there are higher contribution limits even to that of a SEP IRA. This is because you, as the employee of the business and also the employer of the business can make contributions separately to the plan. The contribution limits are the same as the SEP IRA but as mentioned, can essentially be doubled due to the fact that both the employer and employee can contribute.
Two of the key differences of a Solo 401(k) when compared to a SEP IRA, is that you can add a Roth feature in the Solo 401(k) and also that you can add a loan feature as well. This loan feature allows you to take up to $50,000 or 50% of your balance, whichever is less, as a loan from the plan.
The Final Word
Of course there are other intricacies of each of these retirement accounts that you should be aware of and we would encourage you to speak with a financial professional to see which you may have access to and how they can fit into your overall plan. The main thing we like to stress to our clients is that implementing a retirement plan and building a strategy to invest in it for your future can help bring you confidence overtime.
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*Source: https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Plainview, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax or legal services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change.
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