The best retirement plan for you will depend on your work situation and what your employer offers (if you have one), as well as factors like your age and tax bracket. If your company doesn’t offer a 401(k) retirement account, for instance, you can’t participate in one. Read on for guidance on making the pick.
Not sure what the right retirement savings plan is for you? Here are some options you might consider:
A 401(k) plan is an employer-sponsored retirement account that allows you to save and invest work income for the future. There are three main types of 401(k) plans:
One of the benefits of a 401(k) plan is the possibility of an employer match for your contributions. This is an option (but not always offered) in all 401(k) plans, although with a solo 401(k) plan, you are essentially matching your own contributions since you are both the employer and the employee.
|Retirement Plan||Best For...|
|Traditional 401(k)||Earners who would benefit from a tax break now, or who feel that they’re likely to be in a lower tax bracket in retirement|
|Roth 401(k)||Younger earners or those early in their career who feel their taxes may go up in the future or that their tax bracket might be higher in the future|
|Solo 401(k)||Self-employed workers with no full-time employees (except for a spouse)|
Employees of public educational institutions, nonprofits, church-related organizations and state and local government agencies may have the option of a 403(b) or 457(b) plan instead of a 401(k). The plans are similar – you contribute pretax savings and pay taxes on withdrawals – with potentially fewer investment options, although 403(b) plans offer the ability to make additional catch-up contributions to those with more than 15 years of service.
Unlike a 401(k) or 403(b) plan, a 457(b) plan won’t incur a 10% early withdrawal penalty if you leave your job or retire before age 59 ½. Also, you may be able to make large catch-up contributions in the three years prior to retirement age.
|Retirement Plan||Best For...|
|403(b)||Employees of public schools, 501(c)(3) nonprofits or churches|
|457(b)||Employees of state or local government or tax-exempt organizations|
IRAs are retirement accounts that you can open at a financial institution. With the exception of a SEP IRA, which is for self-employed workers or small business owners, IRAs have lower contribution limits than 401(k) plans.
|Retirement Plan||Best For...|
|Traditional IRA||A worker whose employer doesn’t offer a retirement plan benefit or whose adjusted gross income qualifies them to deduct contributions to a traditional IRA|
|Roth IRA||A younger worker or someone at the start of their career who is eligible for a Roth or anyone who expects taxes to be higher in the future|
|SIMPLE IRA||A self-employed person with fewer than 100 employees who wants to allow employees to make contributions to their own SIMPLE (“savings incentive match for employees”) IRA plans|
|SEP IRA||A sole proprietor or self-employed person with few employees, because you must contribute the same amount to your employees’ plans as to your own|
In most cases, the plan you choose will depend on what your employer offers, and the majority of employers, if they offer a plan, offer only one choice. For most people, if your employer offers a 401(k) account, that’s a great option. It automates your retirement savings, which is a boon for the average worker, and many employers offer a company match for contributions.
There are caveats: Not every 401(k) is a slam-dunk. If your company doesn’t offer a match, the investment options aren’t great or fees are high, you may be better off with a different investment option. But the pretax status and high contribution limit of a 401(k) make it a hard choice to pass up.
If your employer offers a choice of plans – such as a 401(k) and 457(b) or 403(b) – note that while you can max out both a 401(k) and 457(b) in the same year, contributions to a 401(k) and 403(b) both count toward your contribution limit so you can’t max out both. Take a look at investment options and expenses to see which one offers the best opportunities.
If your employer offers both a traditional 401(k) and a Roth 401(k), you’ll have to determine whether you want to choose one or the other or contribute to both. Your choice will depend on your tax status: Do you need the tax break now, or do you feel your taxes will be higher in the future?
If your employer doesn’t offer a retirement plan, you can choose from either a deductible IRA or a Roth IRA for your savings, depending on eligibility. As with the 401(k) versus Roth 401(k) choice, what you decide will depend on your current tax status. Ask yourself the same questions: Do you need the tax break now? Do you feel your taxes will be higher or lower in the future?
Your choice may also depend on your income and whether you’re eligible for a Roth IRA. To contribute to a Roth for the 2022 tax year, your modified adjusted gross income must be under $144,000 as a single tax filer or $214,000 as married joint tax filers.
If you want to save more than IRA contribution limits allow, you may want to put money into a taxable brokerage account.
If you have an employer-sponsored retirement plan and you’ve maxed it out, you have other retirement options – but there are restrictions.
You can put money into a traditional IRA, but if your adjusted gross income is at least $78,000 as a single tax filer or $129,000 as a married couple filing jointly, you won’t be able to deduct any contributions. You can still contribute to an IRA, but it will be with post-tax money. You’ll need to keep good records, because you will only owe taxes on earnings – not your original contributions – in retirement.
A Roth IRA is also an option, but you must be eligible to contribute to a Roth. If your adjusted gross income is $129,000 or more as a single tax filer or $204,000 or more as a married couple filing jointly, you’re out of luck.
That leaves a taxable account, which isn’t a retirement account, per se, but you can certainly contribute retirement money to it and there’s no limit on contributions. If you hold investments for more than a year, you’ll owe long-term capital gains taxes – which are generally lower than normal income tax rates – on any gains when you sell.
If you are a sole proprietor with no employees except for your spouse, a solo 401(k) gives you the most flexibility. The plan allows you to contribute up to the traditional 401(k) limit of $20,500 in 2022 (plus a catch-up contribution of $6,500 if you’re 50 or older), but it also allows an employer match (that’s also you) of up to 25% of your salary or net self-employment income. That said, if you also participate in an employer-sponsored 401(k) plan at a full-time job, your 401(k) contributions are limited to $20,500 (plus catch-up if applicable) across both accounts.
It’s also worth noting that some solo 401(k) plans now offer a Roth 401(k) option, meaning that you can save post-tax money to your 401(k) account up to contribution limits. There is no eligibility ceiling on a Roth 401(k).
As a sole proprietor, you can also choose a SEP IRA, but the contribution formula may limit what you can save. Each year you can save the lesser of 25% of employee compensation or $61,000 – or, if you’re calculating your own contributions, 20% of your net earnings from unemployment.
If you have a few employees and you want to provide them with some retirement benefits, a SEP IRA allows you to do that. Employees themselves cannot contribute to the plan, but you (the employer) can make contributions. Note that if you make contributions to your SEP IRA, you must make the same percentage contribution to employee plans, and for all employees eligible for the plan, so this retirement plan is best for small businesses with few employees.
If you have fewer than 100 employees, a SIMPLE IRA allows your employees to contribute to their own accounts. SIMPLE IRA contribution limits are lower than a 401(k) plan at $14,000 in 2022, and employer contributions are mandatory, either matching up to 3% of employee pay or contributing 2% of employee pay up to a maximum salary of $305,000.
The right plan for you will somewhat depend on your stage in life. If you’re younger, you may want to opt for a Roth-type account that allows after-tax savings and no taxes on withdrawals in retirement. If you’re older, you may want to take advantage of a plan that allows for heartier catch-up contributions.
Different retirement plans have varying contribution limits and formulas for determining how much you can save, and that’s important.
If you have a full-time job and make some extra money with a side gig, a solo 401(k) might allow you to put more away than a SEP IRA, which limits you to a percentage of compensation. And if you have a 401(k) plan at work, you’d likely choose to save pretax money there first – up to $20,500, or $27,000 with catch-up contributions – versus an IRA, which limits you to $6,000 or $7,000 with catch-up contributions.
If you’re in a low tax bracket and believe you’re likely to pay higher taxes in the future, a Roth account might be the best choice for you. However, if you’re paying high taxes, getting the tax break now by contributing to a traditional plan might be more valuable.
Even if you believe tax rates might be higher in the future, you might also believe that you’ll be in a lower tax bracket in retirement. In that case, saving pretax money allows you to take the tax break now, let your earnings grow over time and withdraw the money in retirement when you may qualify for a lower tax rate.
Once you’ve chosen the right retirement plan for you, the next step is to set it up and start contributing. If you’re dealing with an employer-sponsored plan, this might be as simple as completing your HR paperwork, selecting a contribution level and choosing investments. Some company 401(k) plans even enroll you automatically when you start your job.
If you’re opening an IRA or a self-employed retirement account, you must make more decisions:
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