Finance

How To Choose The Best Pension Plan

Everyone dreams of a comfortable retirement. However, studies found that 6 out of 10 workers save less than 10% of their income for retirement. On the other hand, a third of the working population save only less than 5% of their income.

As such, how can you increase your retirement plan? The answer is quite simple, pension plans. Pension plans allow you to put aside a retirement fund in small bearable amounts.

The first step to choosing the best pension plan is to decide on which specific plan is suitable for your needs. There are several types of pension plans that you can choose from. This includes 401(k), IRA, and self-employed pension plans.

Don’t have a pension plan yet? Then, read on to find out how to choose the best pension plan for you!

401(k)

The most common type of employer-sponsored pension plan is the 401(k). Your contributions here are automatically withdrawn from your paycheck. They are then directly invested in the fund your employer chose.

A 401(k) plan has an annual contribution limit of $20,500 in 2022. However, if you’re 50 years old or older, you can pay as high as $27,000.

What’s great about these plans is that they allow you to reduce your taxable income. You also won’t pay taxes for any investment growth, as long as the money remains in your account.

However, you have limited investment options with 401(k) plans, as it’s your employer who chooses for you. Thus, your contribution fees may be higher depending on the plan. Also, if you withdraw your fund before you reach 59 years old and 1/2, you’ll have to pay penalty fees.

IRA

So long as you’re earning money or married to someone who is, you can open an IRA account. Compared to employer-sponsored pension plans, IRAs offer a wider variety of investment options.

There are two types of IRA plans, traditional and Roth IRA. If you qualify for both, you can open an account and contribute to both plans.

You get to choose which bank or brokerage will handle your account. You also have the freedom to make all the decisions related to your investment. Thus, you can choose a more affordable contribution fee.

Like 401(k) plans, traditional IRAs are also tax-deferred or pre-taxed. This means that you can expect to pay lower taxable income this year, but you have to pay taxes on distributions.

On the other hand, when you get Roth IRAs, it won’t affect your taxes this year. However, when you do withdraw your retirement money, you won’t pay any tax.

The downside is that the contribution limit to an IRA plan is much lower. For example, you can only contribute $6,000 in 2021 and 2022. However, those who are 50 and older can contribute up to $7,000.

Special Pension Plans for Self-Employed and Small Business Owners

Self-employed and small business owners can opt to get an IRA plan. However, there are special pension plans that allow you to pay a higher contribution limit.

A solo 401(k), for instance, has a contribution limit of up to $61,000 in 2022 or an additional $6,500 if you’re 50 or older. This plan is available to self-employed individuals who don’t have full-time employees.

Anyone can open a solo 401(k) account, since there are no income restrictions. These plans also offer more choices to account owners, as they get the final say in all investment-related decisions. You can also create these accounts at the financial institution you’re already a member of.

Many of these plans are also easy to set up. Thus, they won’t be a burden to process.

Still got questions about the different pension plans for small business owners, including private doctors and lawyers? Visit pacesferrywealth.com for more information.

Shop Around for the Best Pension Plans

Now that you have an idea of which specific pension plan you’re looking for, it’s time to shop around. Take your time to gather as much information as possible about the pension plan you’re considering.

Compare and contrast pension plans from different providers. If possible, get a fact document like a pension plan guide. These kinds of documents contain essential facts about the plan you’re considering. Getting one will help you find which among their plans is best for you.

Here’s a pro-tip, the best pension plans have:

  • High contribution limit
  • Fewer expenses charged
  • Low payment on death
  • Vesting age that matches yours

Make sure to keep these pension plan tips when choosing a pension plan.

The Best Pension Plans Have the Best Payout Option

It’s also best to consider the payout option when choosing a pension plan. For example, under a defined-benefit pension plan like 401ks, you can opt to receive your retirement money in a lump sum of money. This is a one-time payout where you receive the whole amount you contributed.

You can also opt to get your retirement money through an annuity. In here, you’re paid a portion of your retirement monthly.

There are a variety of types of annuities that you can choose from. These include single-life plans, a 50% joint-and-survivor plan, or a 100% joint-and-survivor plan.

If you have a healthy body and can surpass the average life expectancy, annuities are a good choice. However, if you think you’ll live a shorter life than average, a lump sum payout is better.

Get Help From a Financial Professional

Choosing the best pension plan takes a lot of time and requires a deep understanding of your financial needs. This is why it’s advisable to reach out to financial advisers who can help you decide which plan is best for you.

Discover Your Best Pension Plan Today!

In summary, the best pension plan is one that suits your specific needs. If you’re self-employed and want to get a higher retirement payout, getting a solo 401(k) plan is a more viable option.

Meanwhile, if the amount is not an issue, then traditional or Roth IRA is good enough. The best pension plan is also dependent on which payout option suits you.

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