Retirement Plans for Individuals
Individual retirement accounts (IRAs) hold a variety of investments to help an individual save toward retirement. IRAs allow individuals to invest in different types of assets inside the account. Your IRA provider acts as the custodian of the account, and invests the funds based on your wishes. Contributions to traditional IRAs are usually tax-deductible. Taxes on traditional IRA earnings are not paid until a person reaches retirement, and then withdrawals are taxed as income. A person is required to take annual minimum distributions at the age of 72, and there is a 10% tax penalty for early withdrawals from traditional IRAs.
Roth IRAs are similar to Roth 401Ks in that contributions are taxed before they enter the account. This means that earnings and withdrawals are tax-free. Roth IRAs also allow tax-free withdrawals of earnings on contributions after a five -year holding period, under certain conditions. Those conditions include reaching age 59 ½, being disabled, or using the funds for first-time homebuying expenses.
A Simplified Employee Pension (SEP) IRA is available to business owners (with 100 employees or less) and self-employed individuals. SEP IRAs provide tax benefits to employers when they make contributions to employee’s accounts. Employers can contribute up to 25% of employees’ annual salaries into their accounts (capped at $61,000 for 2022), however employees cannot contribute money to their own accounts.
The SIMPLE in SIMPLE IRA stands for Savings Incentive Match Plan. SIMPLE IRAs are available to small businesses that do not have any other retirement savings plan. Like a 401(k) plan, SIMPLE IRAs allow both employee and employer contributions, but with easier and less costly administration, as well as lower contribution limits. SIMPLE IRAs require employers to either contribute 2% of an employee’s annual salary (even if the employee does not contribute) or to match employee contributions at 3%. The annual max contribution for 2022 is $14,000 or $17,000, for those over 50.
Neither Great Point Capital, LLC Financial Advisors nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.
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