What is Retirement Planning and Major Types of Retirement Plans? 

Your retirement aspirations won't happen overnight. To enjoy the retirement life you've always wanted, you need to save. Your employer's retirement plan can be one of your most valuable resources in building your financial future, particularly if you are an inexperienced investor. To others, setting aside even a percentage of your paycheck might seem to have a significant effect on your financial situation when you are initially weighing a reasonable contribution rate. In this post, we will go deeper into retirement planning with expert guidance from Matt Dixon of TruNorth Advisors. In addition, we will learn more about various kinds of retirement plans and tax benefits that aid in your savings. 

What is Retirement Planning? 

Retirement planning is planning for a constant flow of cash post-retirement. It involves saving money and investing with the specific intention. Your retirement plan would be based on your goal, income, and age. 

Types of Retirement Planning 

1. 401(k): The 'Standard' Employee Retirement Plan 

If you're a worker, your company's 401(k) may be a highly convenient retirement plan choice because businesses typically want to make them simple to arrange and administer. A 401(k) is a retirement plan run by most for-profit businesses for the benefit of employees. As a rule, you'll be able to contribute by simply sending some of your paychecks into the retirement plan. 

401(k) pros: 

• A simple alternative if you're a worker. 

• Employer matching contributions. 

• High contribution limits. 

401(k) cons: 

• Limited investment choices. 

• It can take many years before you own your employer's matching contributions outright. 

2. Traditional IRA: A Retirement Plan for Anyone 

IRA stands for Individual Retirement Accounts. As the name suggests, traditional IRAs are tax-favored savings plans that are mostly opened and managed by individuals themselves. Nearly anyone with taxable earnings can contribute to a traditional IRA, with minimal guidance from a retirement planner such as Matt Dixon, so an IRA could be enticing if you don't qualify for an employer's 401(k). 

Traditional IRA pros: 

• Accessible to everyone. 

• Numerous plans and investment options. 

Traditional IRA cons: 

• Minimum contribution limits. 

3. Roth IRA: A Unique Kind of Retirement Plan Tax Benefit 

The most important difference between a Roth IRA and a traditional IRA is when it comes to tax benefits. With a traditional IRA, you have no income tax deduction for your contribution, but you must pay taxes when you withdraw money. With a Roth IRA, it is just the opposite: you pay taxes on the money you have added, but you get to get money tax in retirement - so each dollar in your account ends up in your pocket. 

Roth IRA pros:   

• You might pay less tax in total. 

• You can take money out of retirement tax-free. 

• Looser contribution and withdrawal age restrictions. 

Roth IRA cons: 

• No tax reduction for contributions. 

• Income limits. 

• Low contribution limits. 

4. SEP IRA: For Self-Employed and Small Business Owners 

A SEP IRA (SEP means simplified employee pension) is a specialized IRA employed primarily by self-employed individuals or small business owners, although technically it can be employed by any-sized firm. For companies, these retirement plans can be simpler and less expensive to administer than standard 401(k) plans. 

SEP IRA pros: 

• High contribution limits. 

• For employees, immediate vesting can be beneficial. 

SEP IRA cons: 

• For employers, immediate vesting of employees could be a drawback.   

5. Solo 401(k): For Business Owners without Employees 

Solo 401 (K) plans, or a person or individual 401 (K) plans, can be used to maximize the retirement fund for business owners and self-employed individuals without any employees. They work like traditional 401 (K) plans, but you can increase savings by contributing as both employers and employees. 

Solo 401(k) pros: 

• You might be able to contribute more than with other solo retirement plans. 

• Some enable either traditional pre-tax or Roth (after-tax) contributions. 

Solo 401(k) cons: 

• Restricted investment possibilities, like standard 401(k) plans. 

• It can be more complex to establish than IRAs. 

How Do These 5 Types of Retirement Plans Differ? 

These types of retirement plans differ in numerous ways, but above all in the following primary respects: 

• Tax benefits: They have tax benefits when you contribute to the plan, and others when you take the money out.    

• Contribution limits: The most that you can save yearly.    

• Withdrawal rules: When you can withdraw cash from the plan penalty-free, and penalties for non-qualified withdrawals.    

Conclusion 

All retirement plans offer tax benefits as a retirement savings incentive. The different types of retirement plans vary in features like when you pay income tax, contribution limits, and rules for withdrawal. Some are for workers, some are for business owners and sole proprietors, and some are open to everybody. 

But any individual may or may not be eligible for these plans’ tax benefits, since they have many variables - so it is wise to speak with a professional tax advisor such as TruNorth Advisors regarding your situation.