Finding the best option for your retirement accounts comes down to what is available to you and how you want to save for your “golden years”.
Whether you have employer accounts available, are looking to open your own individual account, or are self-employed and want to know all your options, there is a type of retirement account that will fit your needs precisely.
Individual Retirement Accounts
IRA’s are the most common type of tax advantaged retirement accounts, and are available for anyone that has earned income. Currently you can contribute up to $5,500 to either of these accounts and an additional $1,000 catch up contribution if you are over age 50.
The standard individual retirement account (IRA) is one of the most well known options for investing for retirement. Money is placed into the account pre-tax and grows tax free until you withdraw it, at that point, you will have to pay income taxes on the money.
The advantage to an IRA is if you believe you are going to have a lower income in retirement than you have now, and will pay lower taxes as a result.
Even if you don’t need the money, you will have to start taking minimum distributions starting at age 70 1/2, because the government wants to make sure to tax you before you die.
The Roth has become super popular amount the financial blogger/advice community. The reason is, when you put money into a Roth IRA account, the money has already been taxed.
The money grows tax free and, when you withdraw it during your retirement years, it is not taxed at all. The other advantage to a Roth is that if you do not need to take money out you are not required to take a minimum distrubution starting at age 70 1/2.
This means you can leave a sizeable inheritance that is tax free you your heirs.
Employer Sponsored Retirement Accounts
These types of accounts are only available through your employer.
These plans can frequently have an employer match, which means, if you put money into them, your employer will match a percentage of what you put in. An example would be 50% match up to 5%. That means the employer will put in 50 cents for every dollar you put in, up to 5% of your income.
Many of these plans are now being offered as a Roth account. This means you can put the money in after taxes, just like a Roth IRA, and not pay taxes when you take the money out.
Currently you can contribute up to $18,000 to one of these accounts with an additional $6,000 in catch up contributions if you are over age 50.
The 401(k) is one of the most popular employer sponsored retirement accounts. The money is put in pre-tax and grows tax free. You have to pay income taxes when you withdraw funds and must start withdrawing a minimum distribution at age 70 1/2.
Most employers who offer a 401(k) plan will also offer matching funds. This means that when you put money in they will put a corresponding amount of money in, “matching” your contribution. For an example a company might offer 50% matching funds up to 5% of your income.
This means if you make $45,000 per year and put in 5% of your income ($2,250) the company will add an additional $1,125 into your account. That’s free money, and you know how I love free stuff.
The 403b follows most of the same rules at the 401k, but is reserved for non-profit organizations (religious groups, schools, nonprofit companies, etc.). The only real difference is that a 403b is exempt from some of the administrative processes that are required for 401k accounts. This means that they investor doesn’t tend to get hit with quite as high of fees.
Available to any nonprofit that is a 501(c)(3) in the IRS code. These plans are frequently bundled with 403(b) plans. What makes them great for employees of these organizations is that they have a separate amount of money you can contribute.
This means that you can max out your contribution to the 403b and then continue to put even more money into your 457b for a grand total of $36,000.
The Simple IRA does not follow the same rules as the three other employer sponsored retirement accounts. The plans allow you to contribute up to $12,500 into them each year with and an additional $3,000 investment for catch up contributions, if you are 50 or older. You employer will also match your contributions up to 3% of your income.
Self-Employed Account Options
People who are self-employed get some special advantages. These plans were created to encourage entrepreneurism and reward people for investing in their business, but not being able to invest in their retirement up front.
The Simplified Employee Pension (SEP) IRA is designed to allow the self employed to stock away large sums each year for retirement. A person can contribute up to 25% of their income or $53,000 (whichever one is less).
So if you make $150,000 in a year you can contribute $37,500. The contributions are pre-tax and require that you start taking minimum distributions at age 70 1/2.
The Solo 401k follows the same contribution rules as the standard 401k, but has lower requirements, because only the business owner and his/her spouse can make contributions.
So basically you get all the benefits of the 401K without all the scrutiny that would be required if you have employees.
Standard Investment Accounts
The only downside is that you will have to pay taxes as you go along and are not shielded from the annoyance of taxation. There are plenty of great online brokerage accounts that can be opened to help you with these types of accounts.
Investing for retirement should be a major focus in any of our budgets. Digging through which of the types of retirement accounts are available to you and deciding which one makes the most sense at this particular time in your life will take doing a little time and a little math.
Talk to your employer or if you are self-employed work with one of the online brokerages to get sound advice.