The Bible is clear about being a good steward of our assets. Most Christians are familiar with the parable of the talents and understand that it is not wise to “stuff money under their mattress.” The Bible also makes it clear we are not to chase after “get-rich-quick” schemes, when it says in Proverbs 21: 5, “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.” What the Bible does not specifically outline is whether to invest in a 401(k), Roth IRA, SIMPLE IRA, or any of the other multitude of retirement account options that are available. Ambassador Advisors is committed to helping you navigate what Biblical stewardship might look like for you and your family. Our guidance walks you through the most common types of investment accounts and offers practical wisdom through a Biblical lens.
As the name suggests, employer-sponsored plans are set up and run through an employing company. These plans are only an option to invest in if an employer offers them as a benefit to their employees. The most common plan offered by large employers is a 401(k). There are several benefits to enrolling in a company’s 401(k) plan, especially if there is a matching program available. In this case, maximizing the capture of “free money” offered is the primary recommendation. These plans are often traditional (pre-tax) accounts, meaning these funds grow completely tax-deferred until they are drawn upon in retirement. Additionally, these accounts are protected from creditors by federal law. In recent years, there has been a rise in 401(k) plans offering Roth contributions as well. In this case, the account is funded with after-tax money, but can grow and be distributed tax-free in the future. A 403(b) plan is similar to a 401(k), but can only be offered by certain nonprofit and government organizations. Many public school and hospital employees have a 403(b) plan available to them.
For small businesses, a SIMPLE (Savings Incentive Match Plan for Employees) IRA is a more common solution, because of fewer IRS reporting requirements and easier administration than a 401(k) plan. There are a few small tradeoffs to this, such as lower annual contribution limits and no Roth option. However, the SIMPLE IRA still accomplishes the goal of allowing employees to invest tax-deferred funds towards retirement planning. There is also a 3% match offered by most plans, creating even further incentive for employees to participate. Another benefit of these types of plans, as well as the 401(k) and 403(b) options, is they are deducted directly through payroll, making it easier to build good habits since the money is saved before it ever hits the checking account.
For a sole proprietor, or a small business with no full-time employees, a SEP (Simplified Employee Pension) IRA, or a Solo 401(k) plan is an efficient way to defer income for the future. Although there is often only one participant in these plans, these accounts have higher contribution limits than most other options available. In a situation with high cash flow, these plans can be utilized to reduce taxable income and diversify assets outside of the business.
Personal Retirement Plans
When a retirement plan is not offered through an employer, there are accounts available for any individual to open and invest in, independent of an employer. They can also be utilized in addition to most of the plans already mentioned. These are called IRAs (Individual Retirement Accounts). These accounts come in Roth (after-tax) or traditional (pre-tax) options. While they do have lower annual contribution limits than the employer-sponsored plans, they also offer greater flexibility in many ways. Employer plans are restricted to a limited selection of funds to choose from, while an IRA can be invested with any financial company, and nearly every public stock, bond, or fund available to select from. After leaving or retiring from an employer, a 401(k) or similar account can be transferred to an IRA in the same tax “bucket” in order to gain this flexibility. IRA accounts do have income limits to be aware of before making any contributions.
Bonus Account Option: The HSA
One frequently overlooked account type is an HSA (Health Savings Account). To be eligible for this account, an individual must be participating in a high-deductible health insurance plan. To utilize it for long-term planning purposes, the plan should allow the funds to be invested. If these qualifications are met, the HSA is the only account that can provide a tax-deduction on the funds contributed, tax-free growth on the investments, and tax-free withdraws when used for qualified medical expenses. If the contributions and investment growth outpace the medical expenses withdrawn each year, this account can grow over time to become part of the retirement “nest egg.” And no need to worry about having too much money in this account, as any funds after the age of 65 are treated the same as traditional IRA dollars. This allows penalty-free withdraws (though still taxable) for any retirement expenses, even if they aren’t medical related.
As you discern how best to steward your assets for retirement, remember that the most important part of any plan is to save and invest diligently and consistently, allowing time and compound interest to do the heavy lifting for you. The account-specific IRS rules, such as contribution limits, income limits, and taxability are always evolving due to inflation or new government policies. Working with a trusted professional like Ambassador Advisors can help you stay up to date on the details. W can guide you through an estate plan to ensure steps are in place to protect your assets once you are unable to manage them yourself. When the account type is chosen and established, the next step is selecting how to invest the funds inside of the account. If you aren’t sure which account type fits your situation, or you have an account but aren’t sure if it’s invested appropriately, Ambassador Advisors can provide a comprehensive plan to answer all your questions and ensure you are on the right path to reach financial independence.
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This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.