A Complete Guide to Retirement Accounts

December 25, 2020

Saving for retirement can be a confusing process, largely because of the wide range of options. 401ks, IRAs (roth and otherwise), mutual funds, stock portfolios, and indexes—you have a lot of choices. Luckily, there’s one thing almost every financial advisor can agree on. The earlier you begin saving for retirement, the better off you’ll be.

With proper planning, and a healthy retirement savings account, you can look forward to an earlier retirement, with more fun, security and peace of mind during your golden years. Here’s a guide to the most popular retirement strategies and why each retirement account might work best for you.

The Best Retirement Plans Vary by Individual and Income

Retirement isn’t one-size fits all. Nor should it be. There are so many different retirement plans to choose from because there are so many types of retirees! Most financial planning for retirement is based on your age, income and where you work. There are completely different retirement plans depending on if you’re:

  • Self-employed
  • Small business owner
  • Government agency
  • For-profit company
  • Nonprofit

Understanding which of the following options will work best for you will take some time. And that’s ok. This is a big decision with long-term effects. As you work through different retirement plan options, keep your documents organized and manageable in a secure online document storage service such as Pillar. This will ensure all your information is safe yet accessible, no matter where you are.

What are IRAs?

IRAs are Individual Retirement Accounts backed by the government. There are many different kinds IRAs for various situations, which is why IRAs are common part of many retirement plans. You should consider an IRA if you’ve maxed out your 401(k) or 403(b) contributions for the year, or if your employer doesn’t offer these plans.

Pros of IRAs

Anyone can take retirement savings into their own hands with an IRA, which offers some nice tax benefits. Both Roth and Traditional IRAs are fairly simple to set up and contribute to on a monthly or yearly basis without paying for a broker or money manager, making them great for the average person who doesn’t necessarily need to squeeze every last dime out of their retirement plan.

Cons of IRAs

IRAs are subject to maximum contribution limits each year — the current limit is $6,000 a year (2021), meaning they’re not a great place for explosive growth. IRAs can also incur some hefty tax penalties if you need to withdraw your earnings early (aka before 59 and a half years old), although there are exceptions like medical expenses, higher education costs, disability, and other major life expenses.

Here’s a little more on the major differences between Roth IRAs and traditional IRAs so you can see which one is right for your retirement.

Different Types of IRAs: Roth vs Traditional

Traditional IRAs allow individuals to save for retirement on their own, with no income limits. Contributions to traditional IRAs are generally tax-deductible, and earnings grow tax-deferred. Withdrawals are taxed as ordinary income after age 59 ½. Withdrawals are subject to tax penalties if made early.  

Roth IRAs are for individuals with taxable income less than $140,000, or couples earning less than $208,000. Funds are contributed after taxes, so if you find yourself in a bind, you can withdraw your contributions (not earnings) early with no penalty. 

Spousal IRAs are either traditional or Roth IRAs for married couples when one spouse does not work. 

Fixed Annuities can enable anyone to supplement their retirement savings without limits on contributions. Annuities are special insurance contracts, and there are many different types. Fixed annuities are a popular choice because they have predictable benefits, tax-deferred growth, and they can be paid to a beneficiary upon death.

Best 401k and Other Employer-Sponsored Retirement Plans

Employer-sponsored retirement plans are among the most valuable job benefits, with most respondents rating them as a must-have in a 2019 MetLife Employee Benefits Trends Survey. If you have access to an employer-sponsored plan, it’s generally advisable to opt in as early as possible.

Contribution Plans

In contribution plans, the employee, employer, or both, contribute to the retirement account, often at a set percentage of earnings each year. The funds are generally invested on the employee’s behalf. The balance is based on total contributions, plus any investment gains (or minus any losses). Common contribution plans include 401(k), 403(b), employee stock ownership shares, and profit-sharing plans.

Pros of Contribution Plans

One of the biggest pros of contribution plans is that often employers will match your contribution up to a certain percentage. This is essentially free money that you can either leave on the table, or take advantage and watch it add up exponentially over a few years.

Cons of Contribution Plans

In many cases, you may have limited or no control over where or how your funds are invested, which can sometimes bother people who would, for example, prefer to limit their investments to socially responsible companies.

Retirement Pension / Benefit Plans

Defined benefit plans (also called retirement pensions) are increasingly uncommon these days. Defined benefit pension plans provide retired employees with a specific amount each month. This offers the retiree a predictable source of income which doesn’t rely on the ups and downs of the stock market. 

Types of Employer-Sponsored Retirement Plans

Employers might offer different plans (or none at all).

Traditional and Roth 401(k)s are for employees of for-profit companies. Some employers will match contributions, up to a certain percentage. 

  • Traditional IRA contributions are made before taxes, reducing your total taxable income, and earnings grow tax-deferred. 
  • Roth IRA contributions are made after taxes, so withdrawals are tax free. 
  • When deciding between a traditional and Roth 401(k), consider whether your income tax bracket is likely to be lower now, or in retirement. 

403(b)s (sometimes called a tax-sheltered annuity or TSA plan) are for employees of non-profit organizations, churches and schools. Contributions are made on a pre-tax basis, reducing your total taxable income, and any earnings grow tax-free until the time of withdrawal. Employers may match contributions, up to a certain percentage.

457(b)s are for employees of government agencies. Contributions are made on a pre-tax basis. Earnings grow tax-deferred, so your money grows quickly and you don’t pay any taxes until withdrawal.

Thrift Savings Plans (TSPs) are for federal employees and members of uniformed services. Contributions are pre-tax, and your money grows tax-deferred until the time of withdrawal.

Retirement Accounts for Self-Employed

There are different types of retirement plans for the self-employed, freelancers and small business owners than those working for larger companies. 

SIMPLE IRAs (Savings Incentive Match Plan for Employees) are available for small businesses who don’t have access to other retirement plans. The employer contributes 2-3% of the employee’s income to their plan, which becomes 100% owned by the employee. Employees can optionally contribute as well. Employer contributions are tax-deductible.

SEP IRAs (Simplified Employee Pension plans) are for small businesses and the self-employed. They have higher contribution limits than other IRAs. The employer makes all contributions, which are tax-deductible as a business expense.

Payroll Deduction IRAs are for small business owners who need a simple, low-cost plan for their employees. Participating employees open an IRA at their own bank, and the employer simply facilitates payroll deductions. The employer makes no contributions.

Solo 401(k)s are for self-employed business owners with no employees (except their spouse). They have higher contribution limits than IRAs, and you can contribute to a Solo 401(k) as both an employer and employee. Contributions are tax-deductible as a business or personal expense, depending on how you participate. You can choose between traditional and Roth 401(k) plans, depending on when you want to pay taxes on the money.

Pros of Plans for Self-Employed

SIMPLE and SEP IRAs are among the most popular choices for the self-employed due to their simplicity, ease of use and favorable tax benefits.

Cons of Plans for Self-Employed

IRAs tend to have relatively low contribution limits each year – in 2020, it's $6,000 per year, or $7,000 for those over 50. While it can be a good place to start, many find that they need to save more than this to reach their retirement goals.

A Word on Combining Retirement Accounts

IRAs are individual retirement accounts – they cannot be merged with a spouse’s account. However, in some cases it may make sense to simplify several of your own accounts into a single one with lower administrative fees. This is called an IRA rollover.  

Choosing the Best Retirement Plans for You

If you have a 401(k) or 403(b) through an employer, and have maxed out contributions, you may wish to add an IRA to save more.

If you’re self-employed with no employees other than yourself (and possibly your spouse) look to a SEP IRA or Solo 401(k) for individual contributions to grow your nest egg in tax-favorable conditions.

If you run a small business and are looking for easy-to-manage options for yourself or a few employees, consider a Payroll Deduction IRA or SIMPLE IRA.

Organization is Key 

Retirement planning can be complicated at times, but the pay-off is well worth the effort in the end. Keeping accounts, information and documents organized and accessible is key to keeping it manageable. Consider Pillar Life for secure online document storage that you can access from anywhere. 

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