It is crucial to save for your retirement. But more often than not, making these savings can be difficult. The government offers tons of different retirement investment plans to encourage individuals to save. Aside from the savings, these retirement plans also offer other benefits, such as tax savings. In this article, we shall be discussing some of the most common types of retirement plans, their tax benefits, contribution limits, and withdrawal rules.

401(k)

As an employee, 401(k) is one of the easiest and most convenient retirement investment plans. These plans are usually offered by many non-profit companies as an employee benefit. You can contribute to this investment by simply diverting a part of your paycheck on a monthly or bimonthly basis. Employers usually match the contributions that are made by employees when it comes to a 401(k). Another great advantage is its high contribution limit. Moreover, 401(k)s also offer tons of tax benefits. Meaning if you have dedicated a certain amount of your income to the 401(k) retirement investment plan, that portion of your income is exempt from tax. Another tax benefit is that the amount stored in the plan can grow completely tax-free until you decide to withdraw. When you do withdraw an amount, that amount may be taxable. Considering the 401(k) is a retirement plan, any withdrawal before the age of 59½ may have penalties. Individuals are required to start withdrawing their 401(k) at the age of 72.

Traditional Individual Retirement Arrangement (IRA)

Another great retirement investment plan is the Traditional IRA, which is available to everyone. Traditional IRAs are tax-favored retirement savings plans that are opened and managed by individuals. Anyone who has a taxable income can open and contribute to a traditional IRA. This is one of the most appealing options to those who do not have an employer’s 401(k) plan at their workplace. The traditional IRA is similar to the 401(k) retirement investment plan in many aspects, like the tax exemptions. Much like the 401(k), any contributions made to the traditional IRA will be exempt from taxes. Another similar aspect is the tax-free growth of contributions until the time of withdrawal. However, there are some differences when compared to a 401(k). One major difference is the low contribution amounts for an IRA. Another difference is that traditional IRAs actually have different plans and companies to choose from. This means that individuals have a wide range of investment options.

Simplified Employee Pension (SEP) IRA

The SEP-IRA is a specialized type of IRA typically used by self-employed individuals and small businesses. In many ways, SEP IRAs function similarly to traditional IRAs. One of the major differences between the two is that under the SEP IRAs, employers can make massive contributions of up to 25% from their employee’s incomes. Any self-employed individual can also contribute up to 25% of their net income. Of course, like many other retirement investment plans, the SEP-IRA also has a capped limit on the amount that can be contributed on an annual basis.

Roth IRA

Roth IRA is also similar to traditional IRA but provides greater tax benefits. Under the Roth IRA retirement investment plan, you do not pay taxes on the total amount when you withdraw your money. Instead, you pay taxes when you are making the contributions. This means that all the money saved under the Roth IRA goes straight into your pocket. So, how do you know if the Roth IRA or the Traditional IRA is better for you? This decision needs to be made keeping in mind your tax expectations at the time of retirement. Will you be taxed lower or higher at the time of retirement? If you are charged higher, you may want to opt for the Roth IRA. Another thing to keep in mind is that with a Roth IRA, you can withdraw money without penalties below the age of 72, but there may be some restrictions on the withdrawal.

Solo 401(k)

If you are a business owner with no employees, you may want to consider the Solo 401(k) retirement investment plan. Also known as the one-participant 401(k), these plans help optimize savings for self-employed individuals. They work similarly to the regular 401(k). The only difference is that you will be making contributions both as the employer and employee, which means you can maximize your saving. The best part is that you can contribute up to 100% of the self-employment income and 25% of the business income.