I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.
Do you have a plan for retirement? It is not uncommon for a person to reach retirement age and not have enough money to sustain his or her life.
You may have to take a part-time job to make ends meet if you don't solidify your retirement plan today.
When it comes to retirement, the reality is that you cannot rely on social security to provide you with enough income to survive after retirement.
In addition, you can't expect meager retirement savings to be adequate. CNBC explains that the median retirement savings balance for those 56 to 61 of age in 2016 was only $21,000.
If you consider that the average person spends about $3900 a month on bills and other living expenses, you can easily see that a small amount of savings won't cut it.
If you want your retirement to be a time of relaxation, then you need to start retirement planning now. The first step to finding the best retirement plans is learning about your options because there are many from which to choose.
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Which Retirement Accounts Are Best for You?
Every person has a different situation when it comes to planning for retirement. Your age plays a huge role in your decisions because you will need to make more money in a shorter time if you are older than someone younger.
You'll need to consider the various types of investment options and how they work to know which would suit your needs the best because what works for someone else may not be right for you.
8 Types of IRA Accounts
Individual Retirement Arrangements are a popular tool people use for retirement planning. Through an IRA, you can earn and save money.
There are eight IRA options.
Traditional IRA (Individual Retirement Account)
A traditional IRA is for anyone earning an income and who will currently pay income taxes. Since contributions are not considered to be taxable income, you may not have to pay income tax on the money you put into this type of IRA if you do not have an employer sponsored retirement plan, which makes it nice for self-employed individuals.
There are limits on how much you can put into an IRA based on your age. You also must leave the money in the account until you are 59 1/2 years old or face penalties.
You will pay taxes when taking money from this type of IRA. The average rate of return for a traditional IRA is 13.2%, according to AARP.
Pros
- Good for self-employed individuals
- Easy to start
Cons
- Age restrictions
- Taxed upon distribution
Roth IRA
A Roth IRA depends on your income. You must earn under a set amount of money to have this type of IRA. If you qualify, you won't face taxes for contributions, and you won't pay taxes on withdrawals.
There also is no age limit for taking money penalty-free from a Roth IRA. SmartAsset states the average return on a Roth IRA is 7% to 10%.
Pros
- No penalties
- No taxes
Cons
- Must meet income limits
SEP IRA
A Simplified Employee Pension IRA is specifically for self-employed individuals or small business owners. If you have employees in your business, you have to offer the SEP IRA to them if they meet specific requirements.
Requirements include being at least 21 years old, earning more than $600 annually, and being an employee of your business for at least three years within the past five.
You must make contributions to the plan for your employees as they cannot do so themselves. There is a limit on how much may go into the account - but these tend to be higher contribution limits compared to most employer plans.
You can only contribute the same percentage of income into your account that you contribute to your employees' accounts. The average return rate for an SEP IRA is similar to a traditional IRA.
Pros
- Tax-deductible for your business
- Allows you to easily provide retirement for your employees and yourself
Cons
- Limits on contributions
- Cannot contribute more to your account than you do to your employees' accounts
SIMPLE IRA
A Savings Incentive Match Plan for Employees IRA is another type of IRA that you can offer your employees if you own a small business. The SIMPLE IRA has a few requirements or guidelines.
Your contributions to the IRA accounts of employees must be either 2% of the worker's salary, or you can match the employee's contribution up to 3% of the salary.
You also must contribute to all employees' IRAs. There is a limit on total employee contributions per year. A SIMPLE IRA is fully vested from the start. Your business can deduct the contributions you make from taxes.
A SIMPLE IRA average return rate is similar to a traditional IRA.
Pros
- You can deduct contributions for your business taxes
- Employees are fully vested from day one
Cons
- Your business must contribute to all employees
Spousal IRA
A spousal IRA is a method of using an IRA for married people. Using this approach, you can maximize your retirement savings. You might use a spousal IRA if your spouse does not earn much money or does not have a job.
What you will do is have your spouse open a Roth or traditional IRA in his or her name. The contribution limits come from household income instead of his or her earnings.
Return rates will be the same as the type of IRA you choose.
Pros
- Can increase your retirement savings
- Provides household income limit instead of personal earning limit
Cons
- Only for married couples
Self-directed IRA
Investopedia explains a self-directed IRA has various investment alternatives that you don't have with other IRAs. You manage the IRA, so it is vital that you have some investment knowledge.
A self-directed IRA can be Roth or traditional. You should expect returns similar to either a Roth or traditional IRA.
Pros
- Can hold investments such as real estate
- You manage the account
Cons
- Only available through specialized firms
- You hold all burden for investment decisions
Gold IRA
A gold IRA has its basis in gold instead of regular investments, such as stocks and bonds. In addition to gold, you can also invest in silver or other precious metals.
To cash out, you will have to sell the gold. A gold IRA must be self-directed, but can be traditional or Roth. The main IRA rules apply to this type of IRA.
The return rate for this type of IRA is usually higher than others due to gold consistently climbing in value.
Pros
- Can protect your investment against inflation
- Allows you to diversify your portfolio
Cons
- Gold doesn't earn money like other investments
- Must take a distribution at age 70 1/2
Bitcoin IRA
Bitcoin IRAs get funding from Bitcoins, which is a cryptocurrency. Cryptocurrency is not a legally valid currency, so the IRS does not recognize it as money.
The IRS handles it as property, which will impact the taxation of the Bitcoin IRA. Any IRA that uses Bitcoins is a Bitcoin IRA. You must have a custodian for your IRA, which can be challenging to find.
However, using Bitcoin can protect you during economic downturns and protect your investment much better than your other holdings.
Because Bitcoin is fairly new, there is not a lot of information about the rate of return on your investment.
Pros
- Diversify your portfolio
- Favorable taxation
Cons
- Bitcoin is not stable like other investments
- Large fees
401(k) Plans + Employer-Sponsored Retirement Plans
Other common retirement plan options include 401(k) plans or any employer-sponsored retirement plans. You should note that you do not have to work for someone else, as many of these options also work for self-employed individuals.
401(k)
A 401(k) is an account where you can put money directly from your paycheck before taxation. Within your 401(K) portfolio, you have various investments, so your 401(k) worth can go up and down.
You will not pay any taxes on the money in your account until you withdraw it. It is common practice for employers to match contributions to a 401(k) or offer some money for contributions.
This can help you to grow your account much more quickly than if only you were contributing. The rate of return for 401(k) retirement accounts averages 5% to 8%, according to Investopedia.
This applies to all types of 401(k) plans.
Pros
- Employer contributions do not count towards your total limit each year
- Widely available
Cons
- Limit of the amount you can put into the account
- Minimum age is 21
Solo 401(k)
If you are self-employed, then you can use a solo 401(K). You cannot have any employees to use this type of account. It works like a regular 401(K), which means you can contribute as the employer and the employee.
Any contributions you make as the employer are deductible from your business taxes. You may also deduct contributions on your personal taxes.
Pros
- You can contribute as the employer and employee
- Contributions are tax-deductible
Cons
- You can't have employees
403(b)
A 403(b) account or tax-sheltered annuity is for public school employees and employees of non-profit organizations. It is similar to a 401(k).
Contributions to your account come from your paycheck prior to taxation. There is also a limit to how much you may put in the account each year, and your employer can make contributions.
This type of plan has a similar return rate to a 401(k).
Pros
- No taxes on contributions
- Employer contributions do not count towards the limit
Cons
- Taxation upon withdraw
457(b)
A 457(b) plan is for employees of state and local governments. It is quite similar to a 401(K) when it comes to contributions and taxes.
You also have annual contribution limits. The average rate of return for a 457(b) is similar to a 401(K).
Pros
- No taxes until withdrawing money
- Similar to 401(k)
Cons
- Contribution limits
Pensions
A pension is a retirement plan form your employer that comes from contributions made by your employer. It is a group plan that your employer puts together for all of its employees.
Like a 401(k), the funds in a pension go into investments. Some pensions may allow you to contribute to them, while your employer only funds others.
Pensions are typically defined-benefit plans or defined-contribution plans. A defined-benefit plan provides you with a guaranteed payout upon retirement, whereas a defined-contribution plan doesn't.
IPE gives the average rate of return for pension plans at between 2.27% and 2.48%
Pros
- Employer-funded
- May offer a guaranteed payment
Cons
- You have little control over the plan
TSP
If you are a federal employee or a member of the uniformed services, you can secure a Thrift Savings Plan. A TSP is much like a 401(k) in how it works.
You make contributions pre-tax, and you only pay taxes when withdrawing the money. There is also a limit on contributions per year.
Pros
- Specifically for federal employees or uniformed service members
- Pre-tax contributions
Cons
- Taxed upon withdrawal
What's Next?
You have a lot to think about when it comes to choosing the best retirement plans. There are many options. Fortunately, you can eliminate some of the options specific to certain employment situations.
However, you still have to consider what of the remaining options is the best. It can be tough to figure out what to do. The bottom line is that the sooner you make your choice, the better it will be for you in the end.
If you worry about not having enough money for retirement, you should make your selection and start setting up your account today.
FAQ's
The best retirement option for you depends entirely on your needs. It is different for everyone. According to CNN, stocks and bonds are common choices, but they do come with risks.
You need to make sure that you weigh the risks and your willingness to take chances with your money. Generally speaking, it is easier to invest in the riskier options when you are younger and to choose more stable options when you are older.
However, less risk also means less growth, so you may have to decide between risk and growth to determine what investments are the best choice.
The most popular options for the best retirement plans are a traditional 401(k) and IRA. They are the most common and easiest options.
However, what is popular also depends on your particular situation and job since you may have industry-specific options. Some people prefer pension plans because they are more stable and offer employee-based contributions.
If you aren't employed long, though, you may not benefit as much from a pension. What are the recommended retirement plan options for self-employed & entrepreneurs?
The best retirement plans for self-employed individuals are traditional, Roth, or solo 401(K). These options have specific rules for self-employed individuals.
Of course, you have to meet the requirements, so you may not be able to use all three options. If possible, the solo 401(k) is the option to take for the best overall returns.
You can contribute as an employer and employee, which gives you more money put into the account than you would get from other options.
You should start saving as soon as possible. Due to legal limits, you probably cannot begin until you are 21 years old, but you should start at that age.
Putting off retirement savings is a huge mistake. You may think you have a long time, but the years go by fast. CNN explains that starting as soon as you can allows you to build up enough money to retire comfortably.
Every year, your money will compound, letting you build a nice nest egg for your future.
I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.
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