What are the benefits of a retirement savings plan?
Retirement savings plans have many benefits compared to regular savings plans or investment accounts, and can be an important part of a person's estate plan. 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 until after you retire. Typically, your tax rate will go down when you 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. The most common IRS-approved retirement savings accounts are individual retirement accounts (IRAs) or 401(k) accounts.
Some employer sponsored retirement plans allow you to send part of your paycheck directly to a retirement savings account. Many employers may offer to match what you contribute, up to a certain amount, as a benefit. For example, if you choose to deposit 3% of each paycheck into 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 do I qualify for?
The retirement savings and investment plans that are available to individuals vary. Often, employers provide a few different options to their employees, 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.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 Plan (SARSEP).
- Defined Benefit Plans.
- Money Purchase Plans.
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).
Auto IRAs are another option for employees if they live in states that have 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 can help 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 pays 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.
You may want to talk to a Tax Pro before withdrawing money from your retirement accounts. With a Rocket Legal+ membership, you'll save HALF OFF tax filing services and tax strategy sessions. If you have more questions about setting up a retirement savings plan or the tax implications for different options, reaching out to a Rocket Legal Pro™ is an easy and reliable way to get affordable legal advice.
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.
