Maximizing Your Retirement Contributions: A Comprehensive Guide

This article will identify the most common retirement plans that are available to employees and business owners. The first step in maximizing your retirement contributions is to understand the type of plan that is available to you as an employee or as a business owner. The next step is to determine if the retirement plan requires your contributions to be taken before deducting Federal and State income taxes, or after Federal and State income taxes are withheld. Often, people find it overwhelming when deciding access to pre-tax or after-tax retirement plans. Here is a quick and easy breakdown of the different types of retirement contributions and their advantages.

Employer-Sponsored Plans: These are common plans offered in the United States, allowing employees to contribute a portion of their salary before taxes into an employer-sponsored plan. Employers often match contributions up to a certain percentage, which can significantly boost your retirement savings rate. Examples include:

• 401(k): A retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are taken out. Inside the 401(k) tax-deferred growth will take place. Taxes will begin once distributions begin.
  
• Roth 401(k): very similar to the traditional 401(K), but the key difference is that the Roth 401(k) distributions are tax-free.
  
• 403(b): Similar to 401(k) but typically available to employees of public schools and certain tax-exempt organizations.
  
• 457 Plans: Available to state and local government employees and some non-profit organizations. Contributions are made pre-tax, and there are no early withdrawal penalties for certain circumstances.

Individual Retirement Accounts (IRAs) Individual retirement accounts provide the opportunity to invest a portion of your earned income and grow either tax-deferred or tax-free, depending on the type of account you open. Examples include:

• Traditional IRA: Contributions are often tax-deductible, and investments grow tax deferred until withdrawn. If you and your spouse did not contribute to an employer retirement plan during the year you can take a deduction of up to the lesser $7,000 or $8,000 (if you are age 50 or older), in total contributions to one or more of your traditional IRAs.
  
• Roth IRA: Contributions are made with after-tax dollars, but withdrawals are tax free, provided certain conditions are met. Income limits may reduce or eliminate your ability to contribute to a Roth IRA.
  
• Self-Employed Retirement Plans: Self-employed retirement plans are designed for individuals who are self-employed. These plans offer similar opportunities for individuals to set aside money from their small business ventures for retirement. Examples include:|
  
  • SEP IRA: Simplified Employee Pension plans are ideal for self-employed individuals and small business owners. Contributions are tax-deductible and can be a significant percentage of your income.
    
  • A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account): is a type of retirement savings plan designed for small businesses and self-employed individuals. Create for small businesses with 100 or fewer employees can set up a SIMPLE IRA. Both employers and employees can contribute. Employers are required to either match employee contributions up to 3% of their salary or make a 2% non-elective contribution for all eligible employees. Contributions are tax-deferred, meaning they are made with pre-tax dollars, which can reduce taxable income for the year. For 2024, employees can contribute up to $15,500, with an additional catch-up contribution of $3,500 for those aged 50 and older. Early withdrawals (before age 59½) may be subject to taxes and penalties. SIMPLE IRAs are relatively easy to set up and administer, making them a popular choice for small businesses looking to offer retirement benefits to their employees.
    
  • SIMPLE 401(k): is a retirement savings account offered by small business employers with 100 or fewer employees. The SIMPLE 401(k) works just like a regular 401(k) plan, combining it with the simplicity of a SIMPLE IRA with a few minor changes. Employees can defer some of their wages to the plan and employers must either make a matching or non-elective contribution of a certain amount of each employee’s wages. Employers must meet certain eligibility requirements and the Internal Revenue Service (IRS) sets limits on how much can be contributed each year.
    
  • Solo 401(k): Designed for self-employed individuals with no employees, this plan allows for high contribution limits and tax advantages.

Benefits of Retirement Contributions: There are several unique benefits of retirement contributions to consider:

• Tax Advantages: Many retirement plans offer tax benefits, either through tax deferred growth in Traditional 401(k) plans or tax-free distributions from Roth 401(k) plans. This can reduce your taxable income and increase your savings potential.
  
• Employer Matching: Employer-sponsored plans often include matching contributions, which is essentially free money added to your retirement savings.
  
• Compound Growth: The power of compounding means that your investments can grow exponentially over time, especially if you start contributing early. Here’s a link to a compound growth calculator for visualization, Compound Interest Calculator – NerdWallet.
  
• Financial Security: Consistent contributions may help you achieve a financial cushion during retirement, reducing the risk of outliving your savings.

Strategies for Maximizing Retirement Contributions: Here are a few strategies to maximize the efficiency of your retirement contributions:

1. Start Early: The earlier you start contributing, the more time your investments have to grow. Even small contributions can accumulate significantly over decades.
   
2. Maximize Employer Match: Contribute enough to get the full employer match in your 401(k) or similar plan. This is essentially free money that can boost your savings.
   
3. Increase Contributions Gradually: As your income grows, increase your contribution percentage. Many plans allow you to set automatic increases annually.|
   
4. Take Advantage of Catch-Up Contributions: If you are 50 or older, you can make additional contributions to your retirement accounts, allowing you to save more as you approach retirement.

Conclusion:

Over the last 50 years, companies have eliminated pension plans and replaced them with employer sponsored retirement plans where most of the contributions to the account come from the employee’s ability to save a percentage of their earned income. Retirement contributions are a vital part of planning for retirement. Understanding the different types of retirement accounts, the benefits they offer, and strategies to maximize your contributions, may help you achieve a more secure and comfortable retirement. Start planning today to take full advantage of the opportunities available and build a robust retirement fund. If you have questions regarding which type of account would be beneficial to you contact a Nepsis Advisor for a consulting session.

Advisory Services offered through Nepsis, Inc., An SEC Registered Investment Advisor.

Sources:

Compound Interest Calculator – NerdWallet

What is a SEP IRA and how does it work? | Fidelity

https://www.investopedia.com/terms/1/401kplan.asp

What Is a 457 Plan? (investopedia.com)

What Is A SIMPLE IRA? – Forbes Advisor

SIMPLE IRA – Wikipedia

SIMPLE IRA: Definition, How Small Businesses Use, and Drawbacks

SIMPLE IRA plan | Internal Revenue Service

https://www.taxact.com/support/13840/2020/ira-contribution-deduction-if-coveredby-retirement-plan

https://www.irs.gov/publications/p590a