Are you considering opening a retirement account? Good choice. These days, most seniors cannot get by on Social Security alone. Building up a safety net via a retirement plan is a wise choice for mature adults who want to be comfortable as they live out their golden years. However, planning for retirement is not as easy as simply choosing from a list of policies. It is important that you compare your options to find a retirement plan that works best for you. Here is a look at some of the most common types of retirement plans and how they can help you save for your future.
Types of Retirement Plans
401(k)
A 401(k) is a type of retirement plan often sponsored by employers. With a 401k, employees are able to save a portion of their paychecks before taxes are taken out. Taxes on the saved income are not paid until the money is withdrawn from the account at retirement. Strong savers who are willing to contribute the maximum amount allowed by the IRS each year are good candidates for a 401k. Businesses can take advantage of a number of benefits when choosing a 401k, such as:
- Tax incentives
- Ability to attract and retain talented employees
- Tax deductible employer contributions
- Tax-free growth of assets
Profit Sharing Plans
Profit sharing plans give employees a share of the profits of a company. When businesses offer this type of retirement plan, employees can gain access to a percentage of the company’s profits based on annual or quarterly earnings. There is no set amount that must be contributed to profit sharing plans, but there is a maximum amount that can be contributed per employee. This type of retirement plan is best for companies who want to have full discretion over how and when it makes contributions. Benefits of profit sharing plans include:
- More loyal and productive employees
- Tax deductible contributions
- Low fixed costs once established
Tax Deferred Annuity
Tax deferred annuities allow you to save even more when the maximum contribution amount has been reached. A variable annuity is a type of tax-advantaged retirement account that does not have many of the limitations seen in IRAs and 401(k)’s. With a variable annuity, earnings continue to grow tax-deferred year and after. This type of retirement plan is best for people who do not want to have IRA-imposed contribution limits. Some of the top benefits of tax deferred annuities include:
- Tax-deferred growth
- Wide selection of investments
- Protection for businesses
529 College Savings
Have employees that plan to use their retirement savings to pay for college? There is a better option. A 529 college savings account is a tax-advantaged savings plan specifically designed for saving towards future educational costs. Known as a “qualified tuition plan,” a 529 college savings plan can be used at any qualified college nationwide. Some of the top benefits of opening a 529 college savings account include:
- Hefty tax breaks
- Choice of a variety of investments
- Generous limits
- Accounts that do not expire
Deferred Compensation
Deferred compensation involves putting a portion of an employee’s compensation aside to be paid at a later date. Often times, any taxes on this income are deferred until the funds are paid out. There are several forms of deferred compensation, such as pension plans and stock-option plans. Deferred compensation is best suited for companies who want an advantageous edge when seeking out talented employees. Benefits of this type of retirement plan include:
- Tax benefits
- Capital gains
- Pre-retirement contributions
Tips for Choosing a Plan
Starting a retirement plan is easier than most business owners think. With numerous retirement plans available, both employers and employees can take advantage of tax savings and other amazing benefits. Before choosing a retirement plan, sit down with a professional from a wealth management firm to compare your options. You will want to take a variety of factors into consideration when choosing a plan, such as the number of employees you have and how many are eligible to participate in a retirement plan. You will also want to determine the minimum and maximum contribution limits for both the employee and employer. Ask how each plan is set up and maintained, as well as the costs involved in administration.
Learn More About Retirement Plans
As a business owner, offering a retirement plan is a smart way to attract talented employees and retain loyal and motivated staff. An attractive retirement plan can also make your benefits package more appealing overall. However, it is important to know that not all retirement plans are made equal. Depending on various factors, you may want to choose one plan over another. For more information about the different types of retirement plans available for businesses or how to open an account, contact IFG today.