When you think of retirement, your mind goes to the future. Retirement is a time that feels so far away, it’s hard to imagine.
So you put off saving for a time when you’re making more money because you want to reap the benefits of your work, now not later.
In reality, it’s much closer than we think. According to Bankrate, 57% of American workers feel behind on their retirement savings.
That’s why the earlier you start saving, the better you’ll be, and one of the best ways to do this is by contributing to a retirement plan.
With so many options available, finding a financial plan that’s right for you and your family can be tricky.
In this blog, we cover:
- What a retirement contribution plan is
- The five most common types of retirement plans
What is a Retirement Contribution Plan?
Simply put, a retirement contribution plan is a way to save money for the future. These savings plans often come with tax advantages.
Some are offered through work, and others are available to individuals.
If you have a retirement plan through your work, you and your employer could regularly set money aside for it to grow over time.
The 5 Most Common Retirement Contribution Plans
There are plenty of options on the market, but these are the five most popular:
1. 401(K) Plan
If you work for a private company, they often offer a 401(K) plan.
This plan allows you to contribute a portion of your paycheck before taxes, and employers often match up to a certain percentage (free money!).
2. 403(b) Plan
This retirement contribution plan is a standard option for employees at public schools, nonprofits, and hospitals, for example.
A 403(b) allows employees to contribute some of their salary, and their employers may also contribute. A common advantage of a 403(b) plan is that it has a shorter vesting period which is the timeframe an employee must work for the employer before they gain full ownership of certain assets.
3. Traditional IRA
A traditional IRA is a great option if your employer doesn’t offer a plan. Depending on your income, you may deduct your contributions from your current year’s taxes.
Any earnings within the IRA, such as dividends and capital gains, are tax-deferred until they’re withdrawn in retirement.
4. Roth IRA
Unlike the first three options, a Roth IRA requires you to pay taxes on your contributions.
However, qualified withdrawals in retirement are tax-free.
A Roth IRA is a viable option for people who anticipate being in a higher tax bracket during retirement than they are currently.
5. SEP IRA
A SEP IRA is great for freelancers, small business owners, and other self-employed individuals because of its high contribution limits, easy setup and maintenance, and tax-deductible contributions.
Our Team Can Help
You don’t have to make these decisions alone. Our team can help.
You work hard. Make your money work harder for you in retirement.
Contact us today to get the conversation started.
Frequently Asked Questions
What is a retirement contribution plan?
A retirement contribution plan is a way to save money for the future, often with tax advantages, allowing you (and sometimes your employer) to set funds aside that grow over time for retirement.
What types of retirement plans are covered in this guide?
The guide explains five common plans: 401(k), 403(b), Traditional IRA, Roth IRA, and SEP IRA.
How does a 401(k) plan work?
With a 401(k), you contribute part of your paycheck before taxes, and many employers match contributions up to a certain percentage, helping your savings grow more quickly.
Who might benefit from a Roth IRA versus a Traditional IRA?
A Roth IRA, funded with after‑tax dollars, lets you withdraw qualified earnings tax‑free in retirement, which can be ideal if you expect to be in a higher tax bracket later. A Traditional IRA may let you deduct contributions now with taxes paid when you withdraw in retirement.
Why is a SEP IRA a good choice for self‑employed individuals?
A SEP IRA has higher contribution limits, simpler setup and maintenance, and tax‑deductible contributions, making it a strong option for freelancers or small business owners.
