What are the types of Retirement Plans?
401(k): The 'Standard' Employee Retirement Plan
If you're an employee, your employer's 401(k) could be a very convenient retirement plan option since companies usually strive to make them easy to set up and manage. In addition, many for-profit companies offer a 401(k) retirement plan as an employee benefit. Generally, you can contribute simply by diverting part of your paycheck into the retirement plan.
Traditional IRA: A Retirement Plan for Anyone
As the name suggests, traditional IRAs are tax-favored savings plans that people mostly open and manage. Almost anyone with taxable income can contribute to a traditional IRA, so an IRA may be appealing if you don't have access to an employer's 401(k).
Roth IRA: A Different Type of Retirement Plan Tax Advantage
The most significant difference between a Roth IRA and a traditional IRA is when you get the tax benefits. With a traditional IRA, you pay no income tax on your contributions, but you pay tax when you take the money out. A Roth IRA is the exact opposite: you pay taxes on the money you contribute, but you can withdraw money tax-free at retirement—so every dollar in your account goes into your pocket.
SEP IRA: For Small Business Owners and the Self-Employed
A SEP IRA (SEP stands for simplified employee pension) is a specialized type of IRA used mainly by self-employed people or small business owners, though technically, it can be used by any size company. These retirement plans may be easier and cheaper for employers than traditional 401(k) plans.
Simple IRA: A Simpler Small Business Retirement Plan
A simple IRA is another type of employee retirement plan for small businesses with 100 or fewer employees. If you're an employee and you participate in your employer's Simple IRA, you'll generally receive some contributions from your employer. Simple stands for "Savings Incentive Match Plan for Employees"; employers must either match employee contributions up to 3% of the employee's salary or contribute 2% of an employee's compensation regardless of any contribution from the employee. Employees are always fully vested—they can keep the employer's contributions whenever they leave the company. Employees can contribute up to $14,000 from their salary in 2022 or $17,000 if they're over 50.
Solo 401(k): For Business Owners with No Employees
Solo 401(k) plans, also known as individual or one-participant 401(k) plans, can help maximize retirement savings for self-employed people and business owners that don't have employees. They work a bit like regular 401(k) plans, except that you can boost your savings by contributing as both employer and employee.