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The ABC's of Retirement Plans or Which Retirement Plan is Right for You?

I recently spoke at an international event on how one uses their IRA or 401(k) to invest abroad.

By: Lisa Bromma

IRA Insights

I kept getting the same question over and over by participants in the audience. “Do I have the right retirement plan for my needs or how do I know I am contributing to the right type of IRA? I am so confused, which one is right for me?”

Well, it depends. Are you self-employed or do you work for a company? If you work for a company, do they have a 401(k) plan in place that you can take advantage of? If you are self-employed, what are your financial goals as it pertains to saving for retirement?

Let me try to take a stab at explaining the different types of retirement plans available in plain English as to eliminate any confusion so you can take your next step…funding the right plan.

Most Americans work for a company. About one half of the smaller companies in the U.S. provide a  company 401(k) where they may or may not match your contributions.

Generally, these plans are not self-directed   meaning you cannot buy an asset directly with a company 401(k). If your company provides a company 401(k) you should take advantage of it and put in the maximum contribution allowable by the plan.

Individual 401(k) - If you are the owner and sole employee of the company (aside from your spouse), an Individual 401(k) plan makes sense. It has higher contribution limits for the owner/employee than other plans.
 
In 2009, you can generally put away up to $51,000 in an Individual(k). In addition, you can save as both employer and employee.  As an employee you can put away up to $16,500. As the employer, you can contribute 25% of your compensation on top of this, up to the max of $51,000 or $54,500 if you are over 50.

SEP (Simplified Employee Pension) - This is the most popular choice with Realtors and other commissioned    professionals or those with 1099 income. IRA Maximum contributions are 25% of compensation up to $49,000 or whichever is less for 2009. It allows more ability to put dollars into an IRA than the Traditional IRA. 

Traditional IRA – Anyone who works can have a Traditional IRA. Its counterpart, the Roth IRA offers the same flexibility with better tax treatment. While you do not get a deduction for Roth contributions, you get to take out the Roth’s earnings tax-free in retirement. You won’t be hit with early withdrawal penalties if you are at least 59 1/2 and have kept the money in your Roth for at least five years.

Other differences: You can save in a Traditional IRA no matter how much you earn.  You can use a Roth only if your adjusted gross income before deductions does not exceed $120,000 as a single person and $169,000 as a married couple filing jointly.

SIMPLE (Savings Incentive Match Plan for Employees) - Employees can invest up to $11,500 a year, less than what is allowed under the SEP.  Employers are required to contribute up to 3% of employees’ pay or give all workers—whether or not they contribute—2% of pay.

There are many other types of plans, some very new such as the Roth 401(k). I would encourage you to talk to your local Entrust office to find out specifically what the right plan is for you. To find a local office near you, click our locations link. No matter what you decide, if you do not have an IRA or 401(k), open one now! Let’s face it. No one else is saving for our retirement, and the days of the gold watch and pensions are dwindling. None of us can afford to wait. Get the help you need and start banking your bucks today!

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