Every employee or business owner will, at one point or another, picture what their lives will look like once they’ve done all the work. They naturally come to realize that they need to put aside a portion of their earnings and save up for their golden years. Setting the seal on an agreeable standard of living after retirement is an essential investment. It is never too early to plan this ahead. In this article, we will cover the best retirement plans in 2022 and help you decide on the option that best fits your situation.
- Roth 401(k)
Contrary to Traditional 401(k) that we will mention later on, contributions to Roth 401(k) are made with after-tax money. In return, you won’t ever have to pay taxes on your retirement withdrawals, assuming you’ve had your account for five years or longer. Choosing which 401(k) plan suits you best will largely depend on your current tax bracket and what you would expect tax rates will be in the future.
Easily the most popular employer-offered plan, 401(k) offers substantial tax advantages, as you will contribute pre-tax dollars to the plan, resulting in lower taxable income. You may carry out profitable investments and continue to grow tax-deferred gains up until you withdraw them in retirement. Looking into Human Interest 401k info will provide you with valuable insights on the 401(k) plan. This is an especially adequate option if your employer can match your contribution up to some percentage, and if you can max out your contribution (20.500$/year in 2022).
IRA plans can be an excellent individual retirement choice. It is not uncommon for IRA to be coupled with, say, 401(k). It is actually a great option if you want to spare more income for retirement. There are several types of IRA plans of which we will include the most common.
- Roth IRA
Contributions to Roth IRA, which can go up to 6.000$ a year if you’re younger than 50, 7.000$ if you’re older, are taxed. In exchange, your retirement withdrawals are not. A significant advantage would be the freedom and flexibility Roth IRA entails. You may in fact withdraw your contributions, though not your earnings, before retirement without penalty. It also offers a wider range of investment possibilities. Whereas the income limit is a drawback, the freedom and flexibility that come with Roth IRA make it a very popular choice.
- Traditional IRA
Traditional IRA has the same contribution limit as Roth and keeps the same perks in regards to freedom and flexibility. A key difference is that you contribute pre-tax dollars in return for tax-free withdrawals, which can be advantageous depending on the situation.
- SEP IRA
SEP IRA is suitable for small business owners and employees as well as self-employed individuals such as freelancers. The much higher contribution limit (61.000$ or 25% of annual income in 2022) makes it very attractive. Contributions are made exclusively by the employer and can be tax-deductible.
- SIMPLE IRA
SIMPLE IRA can be convenient for small business owners. They can choose whether they want to match, up to 3%, of what their employees contributed, or contribute 2% of their employees’ salaries irrespective of the latter’s contributions. In addition, since all employees benefit from the same advantages, employers do without the annual nondiscriminatory tests.
On the employee side, this plan is reminiscent of 401(k), though employee contributions are more limited (14.000$ instead of 20.500$). A key advantage is that employees are fully vested, meaning that they can have immediate access to their employer’s contribution.
3. Solo 401(k)
Solo 401(k) is adequate for small business owners and their spouses. Assuming you have no employees, Solo 401(k) allows for larger contributions. With the business owner being the employer and employee, they can make two contributions. These can go up to 25% of your annual income, up to 61.000$ in 2022. If you’re older than 50, the limit becomes 67.500$. Regular and Roth Solo 401(k) are both possible options. Tax advantages are similar to that of the two 401(k) plans.
4. Sector-Dependent Plans
Several retirement plans are designed for workers in specific sectors. These plans are usually convenient for those eligible and offer significant tax advantages. For instance,
- Federal Thrift Saving Plan (TSP) applies to government and uniformed employees.
- 457(b) is available to government employees and some tax-exempt organizations.
- 403(b) benefits workers in sectors such as public schools and non-profit organizations like charities and churches.
At the end of the day, awareness of the several retirement options and what they entail is key to securing a comfortable retirement. Worrying about financial issues and figuring out how to deal with them is work in itself. Who wants that when they are retired? It’s worth bearing in mind that the earlier one plans retirement, the more they can make whichever option they opted for.