Understanding The Differences
Retirement is probably one of the biggest expenses in life, for anyone. And the expenses can surmount if you plan to enjoy more when you retire, say travelling.
Thinking of these challenges to come, it is vital to plan financial support for when you retire. But then again, thinking of retirement planning and investing or saving in the right plans, are two different things. For there are many types of retirement plans.
Nonetheless, this article can help you navigate through your retirement financial planning. And also, understand the differences in the options you have.
Traditional Retirement Arrangements (IRA)
The most common retirement plan that can suit anybody, is an individual retirement arrangement. As the name suggests this plan is managed and funded by the individuals, meaning your employer has nothing to do with it. That being said, this is one of the most suitable options if you’re looking to save your tax bills. But, you need to be wary of a few things. For example, there are penalties if you withdraw from your IRA before a certain age, usually 59+ years. Moreover, it is believed to be the easiest option of all to manage.
For small business owners, contributing to an employee pension plan could be a great option. Notably, these plans offer a higher contribution limit as compared to the IRA. And also, the contributions are tax exempted. But, the tax is deferred only when the withdrawals are made. This is most suitable if you own a small business, as you can contribute up to $56000 or 25% of your income (whichever is lower). As a business owner, you can save a lot of money in taxes while securing your retirement and that for your employees as well.
Employee Stock Ownership (ESOP)
For growing companies and established high-profile businesses, pension plans and IRAs are not enough. Instead, employers offer genuine ownership to their employees in their stocks. As a result, employees receive dividends when they retire. Usually, the allocations are made by the employer based on relative salary perks. For example, an employee holding a key position, say, CEO of the company, is likely to receive bulkier allocations. Additionally, there are several tax benefits for both- employer and the employee.
Payroll Deduction IRAs
Another commonly sought after retirement plan is a payroll deduction IRA. As the name suggests, the employee has to make certain contributions to the IRA from their payroll. Usually, the employee and employer make equal contributions to the IRA. The amount is tax-deferred and is only deductible when withdrawn.
These are some of the more commonly sought after retirement plans. But certainly, these are not the only ones. In personal interests, you can even choose to invest in mutual funds or public holding shares. And all these investments can offer you returns for your retirement.
As for every person who seeks retirement benefits, two factors hold a crucial position- the returns and the risk involved. Whatever retirement plan you choose to invest in, make sure you evaluate these two factors carefully.