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Choose the Right Retirement Accounts in 3 Simple Steps

If you’re confused by all the tax-advantaged retirement account options you can choose from, it’s time to get clarity and use them to build more wealth for the future. Laura walks you through 3 simple steps to choose the right retirement accounts for your situation. 

By
Laura Adams, MBA
11-minute read
Episode #541

Step #2: Choose your retirement plans.

Now that you understand that high earners have income and deduction limits, you can use this information to choose retirement plans. Here’s a summary of the three main types of retirement plans:

  1. Employer-sponsored. Can be used when offered by your employer. Examples include a 401k, 403b, or a 457 plan.  
  2. Self-employed. Can be used by any individual with some amount of self-employment income. Examples include a SEP-IRA, solo 401k, or a SIMPLE IRA.  
  3. Individual. Can be used by any individual (including minors) with some amount of earned income, or by a spouse with no income who files taxes jointly. The only two options are a traditional IRA and a Roth IRA.

You can even have multiple retirement plans as long as you don’t exceed their annual contribution limits. For instance, if you have a job with a 401k and income from a side business, you can contribute to an IRA, a 401k, and a SEP-IRA in the same year.

Rules for Employer-Sponsored Retirement Plans

If you’re fortunate enough to have a retirement account at work, that’s the first plan you should choose. Not only do they come with high contribution limits and broad federal legal protections, but many employers offer free matching funds just to reward you for participating.

If you’re fortunate enough to have a retirement account at work, that’s the first plan you should choose. Not only do they come with high contribution limits and broad federal legal protections, but many employers offer free matching funds just to reward you for participating.

For 2018, you can contribute up to $18,500, or $24,500 if you’re over age 50, to most types of employer-sponsored retirement plans. If your employer pays matching funds, you can exceed the annual limits.

Rules for Self-Employed Retirement Plans

If you don’t have a workplace retirement plan, but are self-employed, a SEP-IRA is a good choice if you have employees or plan to someday. And if you’re a solopreneur with no employees, a solo 401k is a great option.

For 2018, you can make SEP-IRA contributions for each of your employees (including yourself) up to 25% of each employee’s compensation for a maximum of $55,000. If you have a 401k or 403b with another employer, the total you can contribute to both plans is limited to 100% of your compensation, up to $55,000.

With a solo 401k, you can contribute up to 25% of your net earnings up to $55,000, or $61,000 if you’re over age 50. If you also participate in a 401k at another company, the total employee contribution you can make to both plans is $18,500 or $24,500 if you’re over 50.

See also: 5 Steps to Create Your Own Self-Employed Benefits Package

Rules for Individual Retirement Plans

If you’re a worker who doesn’t have a retirement plan at work, your go-to option is an IRA. As I mentioned, just about everyone is qualified to have one and you can combine them with other types of retirement plans.

However, IRA contribution limits are relatively low. As I previously mentioned, for 2018, you can contribute up to $5,500, or $6,500 if you’re over age 50. So, maxing out an employer-sponsored plan or a self-employed plan first makes sense, when possible.

I received a related question from Bill L. who says, “Love the podcast. What options do temporary or part-time employees have to cut taxes and save for retirement when they don’t qualify for a workplace plan that’s only offered to full-time employees?”

Thanks for your note, Bill. Many people work for small businesses that don’t offer a retirement plan or that require you to be a full-timer to qualify. Unfortunately, administering a retirement plan is costly for companies, so consider yourself lucky if you do have one at work.

The solution for anyone who doesn’t have a retirement plan at work is to open an IRA.  And if you work for yourself, you can also choose retirement plans just for the self-employed.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlersbook is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.