posted on August 24th 2017 in Market Commentary & Your Financial Advisor with 0 Comments /

All investments have a combination of benefits and limitations for its investor. Individual Retirement Accounts (IRAs), however, also have nuanced eligibility requirements based on your employment type and income level. Selecting a retirement account isn’t always easy to navigate which is why we recommend that you sit down with financial planner to discuss your options before rushing into a decision. But to get you up to speed with the basics, we’ve put together a snapshot of various options broken down by employment type i.e. Are you self-employed, salaried, or hourly; and whether you are a high earner or in your wealth growth stage.

Traditional Employee:

  • 401(k) accounts sponsored by employers may be one of the simplest places to start for employees with access to one. Often employers offer contribution matches as part of their benefit package. While their contributions may require a vesting timeframe, leveraging employer matching should be capitalized on more often than not.
    • While you are saving long-term with a 401(k), the individual who services your 401(k) now may not be long-term. Unlike investments managed by individual financial planners, 401(k) accounts may be managed by several sets of hands over the course of its life.
    • Access to your funds is restricted considerably until retirement.
  • Employee Stock Ownership Plans (ESOPs) gives employees the opportunity to be a part of the business ownership and reap the rewards of its profits. Participating employees have the freedom to buy AND sell their employee owned stock as they see fit.
    • ESOPs can be combined with other retirement accounts like a 401(k) or IRA, enabling you to diversify your investments.
    • Just like any investment, you may want to discuss your decision to buy or sell additional stock with your financial planner who understands the bigger picture of your goals.
  • Traditional or Roth IRAs can be combined with the above for additional saving power, however you may not benefit from the tax benefits. To learn more about these types of accounts check out our snapshot below or make an appointment to strategize about whether adding an IRA is the right fit for your investment goals.

Self-Employed:

  • Traditional or Roth IRAs are often the best places to start for anyone earning an income who doesn’t otherwise have access to an employer sponsored 401(k) investment account. Investment savings previously held in a 401(k) can also be rolled into this type of IRA. While this is the simplest to set up, the max contribution is $5,500 annually which may be limiting if you fall in a higher tax bracket. Additionally, choosing between a Traditional versus a Roth IRA impacts what kind of a tax break you’ll receive.
    • A Traditional IRA will give you the benefit a tax break each year you make a contribution, however, you will be taxed on your withdrawals as income after retirement.
    • A Roth IRA is somewhat the reverse. While you receive no tax deduction for your contributions, you won’t be taxed on your withdrawals once you’ve retired.
  • Solo 401(k) accounts assume that the holder is both the employer and employee. Unlike Traditional or Roth IRAs, the Solo 401(k) supports higher contribution limits. The parameters mimic a traditional employer sponsored 401(k) allowing you to contribute up to $18,000 annually as an employee. However, there’s an additional benefit of being able to contribute 20-25% of your business’ total earnings as an employer totaling a max contribution limit of $53,000.
    • While this type of account may not be the best fit for anyone with employees, you are allowed to add your spouse as an employee.
    • The contribution amounts are flexible from year to year.
    • There are both Traditional and Roth Solo 401(k) options that share similar rules as Traditional and Roth IRAs
  • Simplified Employee Pension (SEP) IRA may be a better fit than a Solo 401(k) account if you are a high earner but also have a few employees. The contribution limit is up to $54,000 or 25% of compensation annually, whichever is lesser. Lower maintenance than Solo 401(k) accounts but contributions must come from the employers.
    • As a result, all employees must receive the same percentage of pay as you make for yourself which may not be as cost effective depending on your business structure.
    • Contributions are tax-deferred until withdrawal.

In addition to the above, there could also be job-specific options available for instance 403(b) accounts for employees working in education or nonprofit. Employee Stock Ownership Plans (ESOPs). Keep in mind this is just the jump-off point to help expand your awareness of your retirement plan options. This is by no means comprehensive and retirement strategy shouldn’t default to just a plug-and-play investment plan. Your retirement investments should be tailored to your long-term goals as well as your present lifestyle needs. We encourage you to reach out to us and build a better path to retirement.

Continue Reading

Other articles filed under Market Commentary

The Morgan Report Q2 2021 Review – Invest in Coffee!

July 23, 2021 - On July 12, The Wall Street Journal reported coffee prices were soaring due to drought in Brazil, the world's biggest coffee producer. With the prospects of coffee demand exceeding supply, it would seem readily apparent that coffee prices will continue...
Continue Reading

The Morgan Report Q1 2021 Review – An Advocate for Your Values

April 19, 2021 - The last year has been full of challenges that negatively affected our lives. As individuals and families, we’ve had to adjust and be resilient—qualities that will not only help us be successful in life, but in investing as well. The...
Continue Reading

The Morgan Report Q4 2020 Review – Lessons Learned

January 25, 2021 - 2020. Whew! I’m sure we’re all glad that’s over with, but as they say, beware what you ask for. Thankfully, my clients have stayed healthy and have mostly relegated to focusing on other areas of their lives like work, family,...
Continue Reading

The Morgan Report Q3 2020 Review – Get Your FAANG’s Out?

October 14, 2020 - Our experiences are not only, by definition, our lives; they shape our outlook on our future potential and everything around us. Recent negative experiences can hold us back from achieving those things we want to accomplish in life—sometimes temporarily, or...
Continue Reading

The Morgan Report Q2 2020 Review: Walking The Dog

July 17, 2020 - Why does it seem like the investment markets rarely do what you want or expect them to do? It’s like walking a dog. Imagine someone walking a straight line down the sidewalk and hoping the dog will follow the same...
Continue Reading

Return to Blog Home