Many different kinds of retirement plans are available, but determining which one is right for you can be challenging. Although your needs depends on your specific situation, the best retirement plans have some common features. See why these features are key to the best retirement plans, so you can better determine the best strategy for saving for your retirement.
Best Features of IRAs
Individual retirement accounts let you save for retirement on your terms. You decide how much to contribute, how to invest the money, and whether to pay the taxes on the money before you invest it or when you take it out.
The best IRAs offer these features:
- They let you save the way you want to, whether that’s with a weekly or monthly contribution, or with a lump-sum contribution all at once.
- They are taxable when you want, either before you put away the money — as with a Roth — or when you take it out — as with a traditional IRA or SEP.
- Because an IRA is set up by you, it’s easy to include the features you want.
Following are more details on the best feature of each type of IRA. Understand the advantages so you can choose the best type of retirement account for you.
Traditional IRAs: Save Pre-Tax Money
A traditional IRA — also known as the original retirement savings account — lets you save pre-tax money for retirement, and you don’t pay taxes on it until the money is withdrawn. Withdrawals are taxed at a certain rate depending on the time the money was taken out, but because most people are in a lower tax bracket during retirement than when they were working, the taxes shouldn’t be as high.
Roth IRA: Skip Taxes on Withdrawals
A Roth IRA is funded with after-tax money so you cannot deduct contributions on your income tax return, but withdrawals are tax-free. When opening the account, make sure you designate it as a Roth IRA.
SEP IRA: Get Employer Contributions
A SEP IRA, or Simplified Employee Pension IRA, lets employers set up a plan and make contributions to IRA accounts for employees. The employer must contribute an equal percentage of salary for each eligible employee. A SEP IRA is one of the best small-business retirement plans or self-employed retirement plans.
SEP IRA vs. Traditional IRA and Roth IRA
Traditional and Roth IRAs can be set up by an individual as long as he has income, unlike a SEP IRA, which is set up by an employer. Therefore, if you change jobs frequently, your IRA is not affected.
With a traditional or SEP IRA you don’t pay any taxes on contributions or the earnings until you withdraw it during retirement. With a Roth IRA, you pay taxes on the contributions before they’re deposited, but the contributions are not taxed if they’re withdrawn during retirement. This means you can use your investment to earn more money.
With an IRA, you choose what you want to invest in with very few limitations. You can invest in CDs, mutual funds, stocks, bonds and even commodities like gold. You cannot invest in gemstones, stock in an S-Corp, insurance contracts or collectibles.
Best Features of 401ks and Other Employer-Sponsored Plans
Employer-sponsored retirement plans are set up and administered by your employer. Your contributions are deducted from your paycheck, but your employer can also contribute to your account and will offer you several investment options to choose from. Employer-sponsored plans have higher limits on the amount you can save, as opposed to limits placed on an individual account, which means you’ll have more money to spend in retirement.
When you contribute to an employer-sponsored plan, your company can match part of your contribution. If you contribute 10 percent of your salary, for example, your employer might contribute an additional 2 percent. This is free money for you, so if your employer has this option, you should contribute enough to be eligible for the match.
The best employer-sponsored retirement plans have these features:
- An employer contribution, either outright or a match of your contribution
- A wide variety of investment options, ranging from conservative to aggressive
- A high contribution limit so you can invest more of your income for retirement
401k: Put Away Pre-Tax Dollars
A 401k is an employer-sponsored qualified plan that allows employees to defer a percentage of their salary to be put into an individual account. The money you contribute to a traditional 401k is not taxed until you take it out. Roth 401k plans are also available, in which you can deposit after-tax money and pay no taxes when a distribution is made.
403b: Have Your Employers Contribute
A 403b plan is a retirement plan offered by public schools and some tax-exempt organizations like hospitals. Employees can defer a percentage of their salary by contributing to individual accounts. Employers can also contribute to employee’s account.
457b: Deposit Pre-Tax Money
A 457b is a retirement plan for state and local government agencies. Employees and employers can deposit pre-tax money into an account. As of 2017, the contribution limit is $18,000 per year.
Thrift Savings Plan: Contribute to a Qualified Account
Thrift Savings Plans are retirement plans for federal, civil service and military employees. As a government employee, you can contribute to a qualified account and your employer can contribute as well. Contributions are made pre-tax and withdrawals are not taxed. A Roth version of the TSP is available, also: Contributions are made after taxes and withdrawals are tax-free.
Veterans Pension: Get Tax-Free Monetary Benefits
Veterans pensions are a tax-free monetary benefit payable to low-income wartime veterans, their survivors or children. Those who qualify for a pension and are housebound or require the aid and attendance of another person might be eligible for an additional monetary payment. Your annual family income has to be less than the amount set by Congress to qualify for the Veterans Pension benefit. If you’re eligible, your pension benefit is the difference between your countable income and the yearly pension limit set by Congress, which will then be paid to you over the course of 12 months.
Defined Contribution Plan: Lets Your Employer Deposit a Part of Your Salary
A defined contribution plan lets your employer deposit a specific dollar amount or percentage of your salary into a retirement plan. These plans often have a vesting schedule, so you need to stay with your current employer for a certain number of years in order to get all of the money your employer has put away for you.
Pensions: Get Paid a Percentage of Your Salary After You Retire
Pensions, or defined benefit plans, pay you a certain percentage of your salary after you retire with no contributions required on your part. Pensions were a popular retirement plan years ago when companies wanted to entice employees to stay for their entire careers, and retirement lasted 10 or 15 years at the most. But as of 2013, just 34 of Fortune 500 companies offered a defined benefit plan.
Profit-Sharing Plans: Receive Company Contributions
A profit-sharing plan distributes some of the company’s profits into retirement accounts for employees. The company makes voluntary contributions based on how well it has performed.
What the best retirement plans are depend on your specific situation, and choosing the right one can be tough. Remember these two key points:
- Investing something into your retirement is better than investing nothing. Don’t let analysis paralysis stop you from putting money away.
- If your employer offers you free money, whether in the form of a 401k match or profit sharing, take advantage of it.
Keeping these points in mind will help you make the right decision for your financial strategy and personal situation.