What You Need to Know About Retirement Accounts

LAST REVIEWED Oct 29 2020 9 MIN READ

By The Human Interest Team

Employer-sponsored retirement plans are designed to encourage employees to begin depositing funds toward retirement at an early age. Failing to plan for retirement can make the transition from full-time employee to retiree difficult. With so many different types of retirement accounts available, and each one offering different terms and criteria, it is important to understand what your options are when planning for retirement.

Importance of Evaluating Retirement Benefits When Considering a New Job

One of the first things that you might evaluate when considering a new job is the salary. While your compensation should be an important part of the decision, it is also important to consider your benefits package as a whole. The existence of a retirement account can make up for a lower salary, especially if the employer matches your contributions. 

Additionally, it is crucial to begin considering retirement now in order to maximize your savings and prepare for retirement. Because you might also refer to your retirement account as a retirement savings account, this is money that you cannot necessarily access now, but will be available to you during retirement.

With numerous retirement fund options available, it is important to understand the different types of retirement plans. Company-sponsored retirement plans are available through your employer whereas a personal retirement account is a form of retirement program that you might open and fund yourself. Employer-sponsored retirement plans often include incentives to encourage you to invest as much as possible in preparation for retirement.

Advantages of Using a Retirement Account

There are a large number of employees who have access to a work-sponsored retirement account but don’t take advantage of it. 

One of the biggest advantages is the ease in which you can increase a savings account that can then be used for retirement. By contributing a pre-set portion of your paycheck into a retirement account with tax advantages,  your retirement account will increase with minimal effort. Another undervalued advantage is that your retirement account essentially acts as an emergency fund.

Understanding Your Retirement Account Options

There are many retirement options available. Each one offers its own advantages and disadvantages so it is important to do your research and understand what each one entails. These are a few of the retirement accounts that you might consider:

401(k)

A 401(k) plan includes many tax advantages. There are also different types of 401(k) plans available and the best accounts for retirement will depend on your current employment and what is offered through your employer. By setting up an automatic deposit directly out of your paycheck, the deposit is not considered income and therefore, is not taxable.  As long as you wait to withdraw funds from your 401(k) account, you can prevent taxes and penalties. Some employers may encourage employees to maximize their 401(k) savings by offering to match deposits up to a certain percentage.

Advantages of a 401(k) savings account:

  • Low-effort way to save for retirement

  • Minimize taxes owed on your income now

  • Ability to earn free money when employees match contributions

  • Ability to invest in a wide range of stocks

Disadvantages of a 401(k) savings account:

  • Potential penalty for withdrawing funds in an emergency

  • Employers can limit the collection of matched funds if you change jobs

  • Limitations to the available stocks in the employer’s fund

  • Employers are not required to match contributions

403(b)

A 403 (b) plan is very similar to a 401(k) personal retirement plan, except that it is only available to employees who work in certain tax-exempt organizations. This might include public schools, non-profit organizations, ministers, and hospital groups. The process of depositing funds pre-tax automatically from your paycheck is similar to the 401(k) process. You can also expect the same pros and cons to contributing to a 403(b) account.

IRA

An Individual Retirement Account (IRA) is a government-owned retirement plan that encourages employees working in industries or organizations that do not offer traditional 401(k) or other retirement accounts, to put away money for retirement. The government limits contributions to an IRA to $6,000 for employees under the age of 50 and $7,000 for employees over the age of 50.

Advantages of an IRA:

  • You can choose from different investment types including stocks, bonds, and mutual funds

  • You have complete control over which stocks, bonds, and mutual funds make up your retirement portfolio

  • You can contribute to both an employer-sponsored retirement account and an IRA

Disadvantages of an IRA:

  • Limits on the amount you can contribute if you also have an employer-sponsored retirement account

  • Contribution limits to your retirement plan account vary, depending on your income level

  • High-income earners are limited on how much they can contribute

  • Some contributions are subject to pre-taxes

SEP IRA

Small businesses do not always have the necessary resources available to offer retirement savings accounts to their employees. A Simplified Employee Pension (SEP) IRA is a type of self-funded retirement account specifically for small business employees.

Advantages of a SEP IRA:

  • Self-employed employees may take advantage of the SEP IRA

  • Contribution limits are higher than a traditional IRA with a limit of either 25% or $57,000

  • Funds are easier to withdraw before retirement

  • Employees who choose to work for a small business can save for retirement

Disadvantages of a SEP IRA:

  • Only the employer is eligible to contribute to the SEP IRA

  • Limited choice of stocks and bonds to choose

  • Determining the contribution limits for self-employed individuals can be complicated

  • It can be difficult to determine how much you will have available at retirement

457 (b)

A 457(b) plan is a type of supplemental savings plan that is available to state and government employees working in the United States.

Advantages of a 457(b) account:

  • Employees are not taxed on the funds deposited into the account until they withdraw it

  • There are many special clauses available to older workers who are closer to retirement

  • Individuals who want to withdraw funds before they are 59 1/2 are not subject to penalties

Disadvantages of a 457(b) account: 

  • Employers do not match deposits into a 457(b) savings account

  • More restrictions on withdrawing funds from the account

With different retirement plan options available, it can be difficult to choose just one. Choosing the best type of retirement plan requires that you consider your employment, level of financial risk, timeline until retirement, and your options available through your employer. Either way, it is important to take that first step and create a retirement strategy as you begin to build your retirement account.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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