“Hang in there, retirement is only 30 years away!” Workplace graffiti 401k is one of the most common words used when discussing retirement. But what do we really know about them? Most employers offer them to their employees as a means of providing a benefit to their employees. It is also a means of retirement for many workers.
Let’s lay out some stats for you so you get a framework of the influence a 401k has on our retirement.
Total value of assets held in a 401k $4.5 Trillion
Percentage of assets held in a 401k 18%
Total number of participants in a 401k 52,500,000
Percent of works that participate 81%
Average percent of salary contributed 6.8%
Percent of assets held in a mutual fund 64%
The average match of company contributions to 401k plans is 2.7%.
Let’s spend a little time to layout what a 401k is and how it works. Then we will spend some time comparing it to a Roth IRA.
What is a 401k?
“A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.” Wall Street Journal
The 401k was established in 1978 and has grown to become the most popular type of employer-sponsored retirement plan out there.
According to Investopedia. A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes.
A Keogh plan can be set up as a defined-benefit plan or defined-contribution plan, although most plans are set-up as a defined-contribution plan.
More on this later. The Keogh plan was initiated in 1962 and was the invention of a New York congressman named Eugene Keogh. Prior to 2001, they were very popular but due to changes in the tax system they were replaced by the SEP IRA, which has the same contribution limits and much less paperwork. Always a good thing.
So, how can this plan help me?
So who can set up a Keogh plan? Any self-employed individuals or any small business that is a sole proprietorship, partnership, or LLC.
This type of plan is a perfect choice for high-income earners.
Typically the Keogh is funded by the employer.
The Keogh comes in two kinds of flavors.
Defined contribution: these types of plans have two variations. Profit sharing and money purchase. The profit sharing version is most like a SEP, there is a ceiling on contributions. 25% of contributions or $53,000 in 2016. Below these limits you can contribute up to. With the money purchase plan, you can choose the percent you would like to contribute each year. And stick with it, if you don’t the IRS will become your best buddy. Not! Penalty for you.
A Sep IRA stands for simplified employee pension plan which allows an employer to have a simplified way to contribute to an employee’s retirement plan. It also allows them to contribute to their own retirement savings.
Contributions are made to an IRA or Annuity IRA for each employee who participates. This is a SEP IRA.
A SEP IRA account is a Traditional IRA and has the same investment, distributions, and rollover rules as a Traditional IRA.
1. What are the best SEP IRA plans?
As SEP IRAs are considered Traditional IRAs by the IRS. And they have to be set up by your employer the clear answer is a Traditional IRA.
This also means that it will have to same rules in regards to contributions, distributions, and tax related benefits. We discussed these in an earlier post.
Also, any plan that you contribute to is a great plan. The point of all this is to show you the light and help you take action.
2. Can I open a SEP IRA?
If your w2 income comes from that employer then you will need to participate in their retirement plan. If they are small enough they may have a SEP IRA plan for you to participate in.
You also can open up your own Traditional or Roth IRAs as well.