When it is time for your retirement planning, you are going to have access to many retirement accounts. The options often include a 401(k) that is provided by your company or a Simplified Employee Pension (SEP) IRA if you’re self-employed. 

So, when it comes to retirement planning, you are supposed to choose one that suits your financial situation best. Here’s an overview of several retirement accounts and their tax implications.

The 401(k) plan:

You may have often heard of the 401(k) plan since it is the most common of all. Here are some things you need to know about it:

• The employee contribution cap for 2022 is $20,500,
• The catch-up cap for people over 50 is $6,500
• There are no income restrictions, however, contributions cannot be greater than pay.
• The employer’s plan determines the matching contributions.

The 403(b) plan:

This plan is similar to a 401(k) for the commercial sector but has unique features. Here are some key highlights:

• A tax-sheltered retirement alternative for nonprofit employees,
• If offered by your employer, you can pick between regular or Roth alternatives.
• You may be able to make additional contributions if you have 15 years of service.

The IRAs:

IRAs are self-directed retirement accounts. Key highlights:

1. Allows you to postpone taxes until distribution, 
2. Three types of IRA accounts are there:
   • Traditional with tax-deferred growth, 
   • Roth with tax-free growth, and 
   • Rollover for retirement account consolidation. 

SEP IRAs:

Similar to a standard IRA, a SEP IRA (Simplified Employee Pension Individual Retirement Account) offers extra benefits for people without employer-sponsored retirement plans. Key highlights:

• It is a good option for independent contractors, small business owners, freelancers, and employers. 
• Up to 25% of income, or $66,000 in 2023, can be contributed tax-deductible or after-tax. 

Final thoughts:

In case you are wondering when it is the right time to start your retirement account, we are here to help you. You should start your retirement account as soon as it is possible to take advantage of compounding investment returns, which generate additional money over time. 

It is important to remember that since 2020, there are no age limitations on contributions, however, contributions must be made with earned income. While we agree that younger people may have difficulty achieving this condition, self-employed people frequently employ their children to enable early contributions so that they can leverage the power of compounding eventually.