When it comes to growing wealth for your retirement, one of your first decisions will involve choosing from a wide range of IRS retirement plans. While there are many types of plans, a few of them stand out for the financial advantages they offer. Each type of plan has different restrictions and advantages, making it important to distinguish between them.
Employer-Sponsored 401k Plans
There are a couple of advantages to joining your employer’s 401k plan once you’re eligible. Primarily, all of your contributions are tax-free. In addition, employers will match your contributions up to a certain percentage, allowing you to double your contributions. The drawback to a 401k is that there are severe penalties and fines if you withdraw the money before age 59 and a half.
Traditional or Roth IRAs
An individual retirement account or IRA allows you to save and grow retirement wealth separate from any retirement plans offered by your employer. The IRS limits annual contributions. People under age 50 can contribute up to $6,500 annually. Those over age 50 are allowed an additional $1,000 in catch-up contributions each year. In a traditional IRA, your contributions are tax-free, but you’ll pay taxes on your distribution payments upon retirement. In a Roth IRA, you pay taxes on your contributions, but you won’t owe taxes on your distribution payments.
Self-Directed IRA Accounts
One of the IRS retirement plans growing in popularity is the self-directed IRA. This type of account allows you to invest in physical assets, which is something you can’t do with other types of retirement accounts. In a self-directed IRA, you can invest in real estate, precious metals, and other physical assets. However, the IRS has specific rules regarding these investments, so it’s important to review them ahead of time.
Your financial advisor can help you choose which retirement plans will best help you reach your retirement goals.