These Are the Best Retirement Plans 2021 — Which Do You Qualify For?
It’s never too early or too late to save for retirement, but with so many options available, it can be tough to know where to put your money. The trick is to figure out what you qualify for, and then maximize your contributions.
How To Decide Which Retirement Plan Is Best for You
If you don’t already know how much money you need to retire, a retirement calculator can give you a good idea. The type of accounts you steer your money into will play a major role in how successful you are in reaching that goal. By blending two or three plans, you can develop a more diverse and flexible portfolio.
Individual retirement accounts are self-directed and offer basic tax advantages to grow your savings. Traditional and Roth IRAs both limit your annual contributions to $6,000 a year, with the option to make an additional $1,000 “catch-up” contribution once you turn 50.
- Traditional IRA: With a traditional IRA, your contributions are tax-deductible, but you pay taxes on your contributions when you withdraw the funds. The catch is that you must take the required minimum distributions when you reach age 70 1/2.
- Roth IRA: With a Roth IRA, you pay taxes now but make withdrawals tax-free once you reach retirement, and you’ll avoid paying capital gains taxes on the growth. You may contribute to a Roth IRA in years where your income is below $125,000 (or $198,000 for a married couple filing jointly).
Good To Know
An IRS rule for single-income families lets a working spouse make contributions on behalf of the non-working spouse. The rule allows a married couple to potentially double the amount the wage-earning spouse can contribute.
Employer-Sponsored Retirement Plans
Employer-sponsored retirement plans come with benefits for both employer and employee.
Types of Employer-Sponsored Retirement Plans
- 401(k): 401(k) contributions are deducted from your paycheck before taxes, so taxes are deferred until you collect the money in retirement. Some employers match employee 401(k) contributions dollar for dollar up to a certain percentage (usually 3%-5%). You can contribute $19,500 in 2021, plus an extra $6,500 if you’re age 50 or older.
- Roth 401(k): If you have a Roth 401(k), you’ll pay taxes now but won’t owe them when you drawing on the account in retirement. Contribution limits are the same as for a regular 401(k).
- 403(b): Also known as a tax-sheltered annuity, this plan is similar to a 401(k) but is offered by public schools and some charities.
- 457(b): A 457(b) plan is similar to a 401(k) but is only available to employees of state and local governments. The elective deferral limit is $19,500 for 2021, but a “double catch-up” provision allows contributions of twice the normal limit for those within three years of the normal retirement age.
- Defined Benefit Plan: A defined benefit plan is a pension that guarantees a set income level in retirement, based on how long you worked for a company and how much you earned.
- Defined Contribution Plan: A defined contribution plan is also a pension. But rather than pay a guaranteed income in retirement, the employee collects their principal balance — made up of annual contributions from the employer and/or employee — plus any gains the contributions earned.
- Thrift Savings Plan: A thrift savings plan is essentially the 401(k) option for federal employees and our men and women in uniform. Employees can make tax-deductible contributions and automate those contributions. Many agencies match contributions up to a certain level, and there are traditional and Roth options. TSPs limit participants to a handful basic, broad-based investments.
Self-Employed Retirement Plans
A number of plans give business owners, contract employees and self-employed workers the same opportunities to save for retirement as those working a typical 9-to-5 job.
Retirement Options for Self-Employed Individuals
- SEP IRA: SEP IRA contributions are made by the employer, earning them a tax break, with annual caps set at the lesser of either $58,000 or 25% of compensation in 2021. Even if you’re the only employee of your business, you can make larger annual contributions with a SEP IRA than with a traditional or Roth IRA.
- Solo 401(k): A solo 401(k) is a 401(k) plan for sole proprietors and the self-employed. Contribution limits are the same as normal 401(k)s, but since you’re also the employer, you can match your own contributions and enjoy the additional tax benefits.
- SIMPLE IRA: Savings Incentive Match Plan for Employees are only available for businesses with 100 or fewer employees. Employers must usually contribute 3% of the employee’s elective contributions. Elective contributions are limited to $13,500 a year, with a $3,000 catch-up contribution beginning at age 50.
- Profit-Sharing: Profit-sharing retirement plans allow companies to share profits with their employees. These flexible plans can be offered in addition to other retirement plans.
Alternative Retirement Plans To Consider
Take a look at these other types of retirement planning that may fit with your financial goals.
Nonqualified Deferred Compensation Plans
In a nonqualified deferred compensation plan, the employer defers some portion of the wages owed to the employee to a later date. In exchange, the employee earns a “reasonable” rate of return from the employer. It’s mostly used by executives with high salaries who have maxed out contributions to their other retirement accounts but still want some tax-advantaged retirement savings.
Guaranteed Income Annuities
With guaranteed income annuities, you use some of your retirement savings to purchase the annuity and then receive a check every month for the rest of your life. These annuities are notorious for earning large commissions for the advisors who sell them, so speak with a fee-only fiduciary financial advisor before you purchase one.
Cash Value Life Insurance Plan
Cash value life insurance covers you in perpetuity. A portion of your premiums go toward your policy premium, but some will be set aside to earn interest. You can then withdraw those funds later on as needed. The plan provides a guaranteed death benefit with a way to save, but returns are low.
Social Security is the federal pension system that supplies a guaranteed income to retirees across the country. This is one plan that you’re probably getting one way or another.
You have plenty of options for saving for retirement, many of which decrease your tax burden even as your money grows. So, rather than concern yourself with getting the one plan that’s just right, consider opening several different accounts so you’ll have more flexibility to save as much as possible.
Daria Uhlig contributed to the reporting for this article.
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