Do you dream of jetting around the world when you retire? Maybe you’re interested in a life spent living in the French countryside. Or you might just be someone who wants to spend retirement near the Caribbean beaches.
No matter what your ideal retirement looks like, your dreams can be a reality if you start planning today. Learn how to take advantage of employee contributions, employer matching plans, and tax-free retirement plans to start saving more.
The best retirement plan is one that starts early, but it is never too late to begin saving for your future. Apply the following strategies to your money management plan and start preparing for retirement today!
Table of Contents
What is a retirement plan?
A retirement plan involves strategies that allow you to contribute your money towards investments, savings accounts, and other forms of interest-accruing financial decisions that will one day be enough to sustain your lifestyle without a job in the future. The goal of retirement plans is to replace employment income later on down the road.
In the process of creating a retirement plan for you, you’ll want to set income and savings goals while also factoring in both current and future expenses. By starting to plan for your retirement at an early age, you are putting yourself in the best position to make long term-savings goals, take advantage of compound interest, and capitalize on tax-free retirement savings.
Why is a retirement plan important?
A retirement plan is important to ensure that basic living and medical expenses are covered throughout your entire life. By saving for retirement now, you are taking measures to ensure that you are cared for in your later years. Retirement plans give you the security of knowing that no matter what comes up, you have the money to live comfortably.
But saving for retirement is easier said than done. Approximately 26% of American adults don’t have retirement savings, while 38% haven’t started saving by the age of 29. And yet, the majority of Americans say they wish they had started saving for retirement earlier.
Which type of retirement plan is right for me?
The best type of retirement plan is one that suits your form of employment, your age, and your long-term goals. The best retirement plan for small business owners will be different from the best retirement plan for an employee at a large company. Here are some of the many retirement plan options!
An employer-sponsored retirement plan is also called a 401(k).
Best for: Employees looking to maximize their retirement savings.
Benefits: The benefits of employer-sponsored plans are matching contributions, tax-free growth, stock options, and other retirement savings incentives.
Advantages: The main advantage of employer-sponsored retirement plans or retirement accounts is that they are easy to set up. They also often include automatic contributions, meaning you’ll usually get employer-matching funds, so be sure to ask your employer about a match plan. You also get the advantage of tax-free growth.
Disadvantages: The primary disadvantage of employer-sponsored retirement plans is that they may limit contribution amounts. In some cases, 401(k)s are difficult to set up, and some employer-sponsored retirement plans are taxed, so you’ll want to do your research to figure out if this applies to you.
Individual investment account (IRA)
An individual investment account—called an IRA—is a tax-advantaged account used to save and invest for retirement. These accounts are usually tax-deductible and they allow for tax-free investment growth. However, you will be subjected to penalties for any withdrawals made before you turn 59 ½ years old.
Best for: Everyone who is saving for retirement, especially those under 60. There are contribution limits on the IRA—(about $6000 in 2021—but because of the tax and savings benefits, it is worth maximizing IRA deposits.
Benefits: The main benefit of an IRA is that your retirement account can grow tax-free. You can also deduct your annual contributions from your income for the year, further reducing your tax burden. Many employers will match employee contributions, which increases your savings even more.
Advantages: The advantages of this type of retirement plan lie in the tax benefits. An IRA allows your retirement savings to grow tax-free.
Disadvantages: The main disadvantage of an IRA is that there are contribution limits. You also need to have a taxable income to be able to contribute to an IRA.
Self-employed or small business owner
Retirement plans for small business owners or people who are self-employed include sep IRAs, solo 401(k)s, solo Roth 401(k)s, and simple IRAs. These types of tax-advantaged retirement plans are specifically designed for small business owners and sole proprietors. With an IRA, you will receive the benefits of both a traditional IRA and a 401(k) retirement savings plan, not only for yourself but for your employees as well.
Best for: Small business owners, sole proprietors, freelancers, and anyone working as a contractor or self-employed individual.
Benefits: There are many options for tax-free retirement contributions. Also, small business owners are able to match funds and contribute to their employees’ retirement plans. These are the best retirement plans for small business owners.
Advantages: The top advantage of these types of retirement plans is the ease of setup. Additionally, these retirement plans offer the option of tax-free growth for both retirement savings and investments alike. You can also combine various types of savings accounts in a way that maximizes tax advantages and elevates overall investment growth.
Disadvantages: Self-employed retirement plans are time-consuming, making the setup process slightly disadvantageous and confusing for new business owners. There are also contribution limitations, as well as circumstances in which both the investments and the returns are taxable, which is easier to handle with the help of professional advice.
Greater savings for greater opportunities
Planning for retirement doesn’t have to be a chore. With research backing your decisions, you can make the best retirement plan for your goals and create the future of your dreams.
Whether you make $200 or $200,000 per year, knowing how to invest your money in tax-advantaged retirement accounts will allow your resources to grow. Those seemingly small contributions will add up when you start young, generating a very comfortable retirement fund and life-long security for your future.
A MoneyLion investment account is one of the best ways to prepare for retirement. With zero management fees, a personalized portfolio, and no minimum balance, you can open a MoneyLion investment account in minutes. Start planning for retirement today!