While retirement may still be miles down the road, it’s always a good idea to begin planning for it as soon as possible. The longer you contribute, the greater your future nest egg will grow to be. Even if you aren’t working for a company that offers its employees a sponsored retirement plan, there are still options. Before you delve further into the retirement account that best suits you, let’s go over the available retirement accounts and better understand what they offer.
Anyone who earns an income is able to contribute to these retirement accounts. The two most basic retirement accounts include a Traditional IRA and a Roth IRA. Sometimes referred to as an Individual Retirement Account, both are very similar. Freelance workers can easily set up an IRA or Roth IRA using online companies such as Fidelity or Charles Schwab. Keep in mind that with these options, there is a maximum annual amount allowable to contribute. In 2023, that cap is $6,500. If you are over the age of 50, then you are allowed to play “catch up” and can contribute an additional $1,000 each year.
This option lets your money grow tax-deferred until you hit your retirement years. You can’t withdraw these funds until you are 59.5 years old to avoid the pretty sizable penalty fee. When it comes time to withdraw, you then pay taxes based on what tax bracket you fall in. The Traditional IRA allows individuals whose income falls below certain limits to take a tax deduction for their contributions.
Just like a Traditional IRA, a Roth IRA has many of the same rules and requirements. The key differences are that contributions with this option cannot be tax deductible. They pay no taxes on the money they withdraw. Another difference is that, unlike the Traditional IRA, this account type has no requirement for distributions, so it can sit there for as long as you like. Lastly, the amount you can contribute relies on your income. You have to fall within specific parameters. You can visit the IRS website for the formulas and tables or consult a tax specialist to determine this.
But what if you are nearing your retirement years and need to do some significant catch-up? Or maybe your dreams of retirement require a rather hefty amount of savings? Then consider a Solo 401(k) or a SEP-IRA.
This would be a good option for those self-employed gig workers bringing in high-paying jobs. Similar to the traditional 401(k), only this option allows the individual to maximize their profits. By being a solo business owner, you can capitalize on your profit by contributing as an employer and an employee. Some stipulations include you may not have any employees other than a spouse, and the annual contribution limit is $66,000.
This stands for Simplified Employee Pension and is available to small business owners, including any employees they may have. As the name states, it’s a simplified retirement plan and, therefore, less costly than other 401(k) plans. You will be taxed come time to withdraw. The primary perk of a SEP-IRA account is your contributions can be much higher than that of others. With the limit for 2023 being $66,000, or 25% of your earnings, whichever is less, this is a great way to grow your retirement account sizably, providing your budget allows for it.
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