What are the benefits of a retirement savings plan?
Retirement savings plans have many benefits compared to regular savings or investment accounts. First, they are savings accounts designed for retirement, and the Internal Revenue Service (IRS) lets you wait to pay taxes on the money you save in them. The most common IRS-approved retirement savings accounts are individual retirement accounts (IRAs) or 401(k) accounts.
A retirement savings plan is an investment account that lets a person wait to pay taxes on their investments until after retirement. Typically, a person’s tax rate will go down when they retire, and these plans are designed to take advantage of this tax break. Also, this special tax treatment means that these accounts can usually grow larger.
Some employer sponsored retirement plans let you send part of your paycheck directly to a retirement savings account. Many employers will offer to match what you contribute, up to a certain amount, as a benefit. For example, if you choose to send 3% of each paycheck to your retirement account, your employer may add an extra 3%.
If you are self-employed, or interested in diversifying your retirement savings, you may need to research the various options to find the right one for you. Speaking with a financial advisor may also help you find the best way to invest. There are different strategies based on when you plan to retire and how much you can realistically save. Usually, more aggressive investments come with a higher risk of loss.
Another common benefit of these retirement investment accounts is that the person who owns the account can choose who gets the remaining money when they die. When a person dies, their account can pass to the named person, or beneficiary, faster than had it gone through a Last Will and Testament.
While a regular savings account may earn some interest, these are usually best for emergencies, vacations, and short-term goals, rather than retirement savings. The IRS typically sees interest from savings and investment accounts as taxable income.
What retirement savings plans can I qualify for?
The retirement savings and investment plans that are available to individuals vary. Often, employers provide a few different options, while self-employed individuals will have to explore options on their own.
Employees usually add money to a retirement account through an employer-sponsored plan. If there is no plan, or they want to save more, they can also invest in separate retirement savings plans. The most common plan is a 401(k). Employers can also offer:
- 401(a) plans or an employee stock ownership plan (ESOP).
- Payroll deduction IRAs.
- Profit-sharing plans.
- Salary reduction simplified employee pension plans (SARSEP).
- Defined Benefit Plans.
- Money Purchase Plans.
Auto IRAs are another option for employees if they live in states that have started state-sponsored retirement savings plans for workers in their state. The plans are designed to help individuals who cannot save enough money through their jobs. So far, these plans are in place in Illinois, Oregon, California, Connecticut, Maryland, New Jersey, Colorado, Virginia, and Maine, as well as New York City.
Self-employed individuals, and employees without employer-provided retirement benefits, can still invest in a retirement savings plan. Some options include a simplified-employee pension (SEP), one-participant 401(k), and Savings Incentive Match Plan for Employees (SIMPLE IRA) plans. With an SEP, a person can add up to 25% of their net earnings from self-employment to the account. Net earnings are the amount the person earns after taxes, costs, and deductions. Examples of one-participant 401(k) plans are solo 401(k), solo-k, uni-k, and one-participant k plans.
Which retirement savings plans are available to self-employed people?
Self-employed people have several options when it comes to retirement plans. The various available plans were created to allow different types of qualifying individuals, from small business owners to freelancers and contractors, to benefit. Some common options include:
- A simplified-employee pension (SEP) IRA plan.
- One-participant 401(k).
- Savings Incentive Match Plan for Employees (SIMPLE IRA) plan.
- IRAs, both traditional and Roth.
- Money purchase plans.
The IRS has a wide range of resources to help self-employed people set up their retirement accounts. The amount you can add to each type of account per year may have limits. For example, in 2022, both traditional and Roth IRAs have limits of $6,000 or, if you are older than 50, $7,000.
Is it legal to withdraw money from a retirement savings account?
Yes, it is legal to withdraw money from a retirement savings account. However, it is helpful for the person who is pulling the funds out to understand that they are likely to face a financial penalty. Generally, to withdraw money from a retirement account, a person must pay taxes and a penalty. There are limited circumstances when withdrawing money before retirement will not lead to a penalty, such as when rolling over funds from one 401(k) to another.
If you have legal questions about withdrawing money from your retirement accounts, you may want to ask a lawyer.
If you have additional legal questions about setting up a retirement savings plan or the tax implications for different options, reach out to a Rocket Lawyer On Call® attorney.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.