Preparing for your financial future is essential. Whether you are self-employed, an employee or a business owner, there is a retirement account that can help you satisfy this need. The rules and regulations affecting the accounts are stipulated and regulated by the Internal Revenue Service (IRS). Failure to comply with the regulations can result in punitive damages.
SEP
One of the easiest retirement funds in existence for both the employer and employee is found in a simplified employee pension (SEP). It allows employers to set up and make contributions to a traditional individual retirement arrangement known as an SEP-IRA. When set up, employers are required to make contributions in the account. Each eligible employee owns and has control over his account, not the employer. An eligible employee must be at least 21 years of age, have been an employee for at least three of the five previous years and received a set minimum level of compensation (which changes periodically). Contributions are made to the financial institution maintaining the SEP account, and any contributions you make into the plan are tax-deductible, states the IRS.
Simple IRA
Another retirement fund account offered by small businesses is known as a simple IRA. If you participate in a simple IRA, you are not allowed to have other retirement fund account,s says the IRS. This account type involves a contribution rule stating that employers are required to make contributions into the account, but employees have the option of choosing to contribute. If you are an employee and make a contribution, your employer is required to match it dollar-for-dollar, according to IRS Publication 560 (Retirement Plans for Small Businesses). Employees can choose to have their contributions made via payroll deduction, states the IRS. Employees can also choose to have their contributions made immediately or deferred to the next plan year. Employers who participate in simple accounts, in general, cannot have more than 100 employees.
401k plan
If you work for a larger-sized company, the firm may offer a traditional 401k plan for you to participate in. This type of retirement fund account can be more costly and complex to operate than other types, says msnmoney.com. 401k funds have defined contributions. This means that employers state how much they will contribute into the plan. Employees usually make contributions into the account via payroll deduction. Whatever the employee contributes, the employer will match up to a stipulated limit. It is up to the employee to monitor the account and be sure that that herfunds are being invested properly.
Roth IRA
A Roth IRA, basically, has the same rules and regulations as the traditional (sometimes known as "regular") IRA. One notable difference involves the fact that Roth IRAs do not have any stipulated minimum distribution rules in place. Secondly, when you withdraw funds upon reaching retirement, the distribution is not taxable, says the IRS. This is because you cannot deduct your contributions to your Roth IRA on your income tax return.
Traditional IRA
A traditional IRA is defined by the IRS as one that is not either a simple IRA or Roth IRA, states IRS Publication 590. This type of fund requires minimum distributions be made at age 70 1/2 and, like the Roth IRA, contains contribution limits based upon variable factors such as adjusted gross income, filing status and taxable compensation.
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