Preparation for retirement and Retirement plans
Retirement is a beautiful thing. It is the time of your golden ages. This is the time for you to rest and enjoy all your hard work over the years.
While still working, it is necessary to plan ahead for this time of your life. Retiring to an empty account, no savings, zero investment, etc., could be very frustrating. Retiring to a robust account, savings or investment is very interesting. This is why a retirement plan is very important. A retirement plan makes provisions for your years of retirement.
There are various retirement plans out there. Most of them are similar in their mode of operations, while others are different. Their differences could be in the method of taxation, eligibility, withdrawal, etc.
IRA (Individual Retirement Account/Arrangements)
An IRA is a type of account in which an individual save and invests ahead of retirement. It has a tax advantage.
IRA accounts are normally opened with firms which have the approval of the IRS (Internal Revenue Service) to offer these types of accounts. Such firms include; Banks, savings and loan firms, brokerage firms, etc. Some factors which determine the type of IRAs you can open and if your contributions are prone to taxation include:
- Your income and,
- Whether you have a retirement plan at work
Due to the fact that IRAs are strictly for retirement savings, you are not allowed to make withdrawal from this account until the age of 59 ½. Going against this rule attracts a penalty of 10%. You may also need to pay tax on early withdrawal. This depends on the type of IRA account you have.
The various types of IRAs account include:
- Traditional IRA account
- Roth IRA account
- SEP IRA account
- SIMPLE IRA account
401(k)
The 401(K) is a type of retirement account offered by employers to their employees. It is a tax-advantage account.
This type of account is also known as defined contribution plan. Both the employer and the employee are able to make contributions to this account; their contributions must not pass the dollar limit. The dollar limit is set by the Internal Revenue Service.
There are two types of 401(K) accounts:
- Traditional 401(K) and
- Roth 401(K)
Both types of account have similar features but they differ in the way they are taxed. An employee can decide to have either or both types of account.
Depending on the options which the employers are offering, the employees can decide to share their money in both accounts. In doing that, it should be noted that the total amount must not exceed the limit of one account.
The SECURE Act
Secure – Setting Every Community Up for Retirement Enhancement –
The SECURE Act which was signed into law December 20, 2019, aims at improving the provisions for retirement. This act includes reforms which will reflects improvement in retirement plans such as Defined Contribution Plan 401(K), Individual Retirement Account (IRA), etc.
The SECURE Act and your estate plan
The SECURE Act was signed into law to make retirement savings ease and accessible. Some of the effects of its provisions include:
- Required minimum distributions (RMD) now begin at age 72
- It is possible for you to now make IRA contributions beyond 70½ years: this means that in as much as you are still working, you can keep contributing to your IRA beyond age 70½.
- Unlike before, the SECURE Act has made it possible for both long–term and part–time workers to be able to join their company’s 401(K) plan. This was not as before when workers whose work hours were below 1,000 hours per year were not eligible to partake in their company’s 401(K) plan.
- You are now required to take an inherited IRA distribution within 10 years unlike before when you can stretch an inherited IRA for as long as you wish.
- Small business owners are eligible to receive tax credit for starting a retirement plan. Also it is now easier for them to join together to offer defined contribution retirement plan.
- Unlike before when an early withdrawal attracts a penalty fine; now you are allowed to withdraw up to $5,000 per parent from your retirement plan upon giving birth or when you adopt a child.
These are some of the changes the SECURE Act has on your estate plan. To know more about your retirement options, call us today. Our attorneys are always available to take you calls.
