As we continue to discuss building a God honoring financial plan, we begin to discuss the third building block of the plan, which is qualified investing. The most common options for qualified investing are dependent upon your type of employment. For those that are self-employed or work at an employer that does not offer a retirement plan, the traditional IRA and Roth IRA may be an option you use.
A traditional IRA is an individual retirement arrangement (IRA), established in the United States by the Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93–406, 88 Stat. 829, enacted September 2, 1974, codified in part at 29 U.S.C. ch. 18). Normal IRAs also existed before ERISA.
A Roth IRA is an individual retirement account (IRA) under United States law that is generally not taxed upon distribution, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement plans is that rather than granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free.
Another option for self-employed business owners may include the SEP IRA.
A Simplified Employee Pension Individual Retirement Arrangement is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for themselves and their employees. There are no significant administration costs for a self-employed person with no employees. If the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. Since SEP-IRAs are a type of IRA, funds can be invested the same way as most other IRAs.
For those people who work for a healthcare organization, not-for profit, or educational position, a 403 plan may be offered to you through your employer.
In the United States, a 403(b) plan is a U.S. tax-advantaged retirement savings plan available for public education organizations, some non-profit employers (only Internal Revenue Code 501(c organizations), cooperative hospital service organizations, and self-employed ministers in the United States. It has tax treatment similar to a 401(k) plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001.
If you work with a municipality, a 457 plan is an option that could be available.
The 457 plan is a type of nonqualified, tax advantaged deferred-compensation retirement plan that is available for governmental and certain nongovernmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pretax or after-tax basis. For the most part, the plan operates similarly to a 401(k) or 403(b) plan with which most people in the US are familiar. The key difference is that unlike with a 401(k) plan, it has no 10% penalty for withdrawal before the age of 55. These 457 plans can also allow independent contractors to participate in the plan, where 401(k) and 403(b) plans cannot.
And the most popular plan many employees have available to them is the 401k.
In the United States, a 401(k) plan is an employer-sponsored defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code. Employee funding comes directly off their paycheck and may be matched by the employer. There are two main types corresponding to the same distinction in an Individual Retirement Account; variously referred to as traditional vs. Roth, or tax-deferred vs. tax exempt, or EET vs. TEE. For both types profits in the account are never taxed. For tax exempt accounts contributions and withdrawals have no impact on income tax. For tax deferred accounts contributions may be deducted from taxable income and withdrawals are added to taxable income. There are limits to contributions, rules governing withdrawals and possible penalties
It is important you speak with an advisor and a tax professional to determine contribution limits and taxable consequences to each plan that may be available to you.
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