Retirement planning can be complex yet essential. Various retirement account options may suit you well, depending on factors such as your employer and tax preferences. Here are the top nine types of retirement plans.
Top 9 Retirement Plans you should consider.
Certain retirement plans cater to individuals in full-time employment, while others are specifically tailored for business owners. Some plans are flexible enough to accommodate individuals regardless of their circumstances. Each plan comes with its own set of advantages and disadvantages.
- Traditional IRA
- Roth IRA
- SIMPLE IRA
- Solo 401(k)
- Defined benefit plan
- Traditional IRA
An Individual Retirement Account (IRA) is a savings account that can be opened and managed by any individual with taxable income. An IRA provides a tax benefit because once you make a contribution, your IRA funds will continue to grow, and you will not pay taxes on them until you take them out. IRA plans vary widely from one financial service company to another, so they can be tailored to meet the needs of any individual, regardless of income. This flexibility allows you to select the investment options that best suit your needs.
2. Roth IRA
What is a Roth IRA?
A Roth IRA is essentially the same as a traditional IRA. What’s the main difference between the two?
With a traditional IRA, taxes are paid on contributions, but not on withdrawals when you retire. A Roth IRA, on the other hand, pays taxes on contributions as they’re made, but doesn’t pay taxes on withdrawals when you make them.
Unlike some of the other options, a Roth IRA allows you to start taking money out early under certain conditions.
A simplified employee pension IRA (SEP-IRA) is a type of IRA designed for self-employed or self-employed business owners.
The structure of a SEP-I IRA is similar to a traditional IRA, but the main difference is that employers can contribute more than they would with a traditional IRA.
As of 2024, employers can contribute up to $69,000 of an employee’s income.
Because the contribution is tied to income, employers can make smaller contributions in years when their business makes less money. This is beneficial for employers, but less so for employees.
The 401(k) is the most popular retirement plan offered by employers. Contributions to a 401(k) are not taxed until withdrawal, when you pay income tax on the amount taken out. Generally, you must be at least 59 1/2 to withdraw funds without penalty, with some exceptions. Withdrawal becomes mandatory at age 72. Many employers match a portion of 401(k) contributions, though you may forfeit unvested employer contributions if you leave the company. However, you can roll over your 401(k) balance into a new employer’s plan or an IRA when changing jobs.
6. Solo 401(k)
A solo 401(k) is similar to a standard 401(k), but it’s for self-employed individuals with no employees. This type of retirement plan treats you as both an employer and an employee. That means you can make contributions as both — which translates to potentially more tax-deferred savings than you’re allowed with a standard 401(k).
You can contribute as much as 100% of your earned income from self-employment, up to contribution limits. The limit on contributions you can make as an employee is $23,000 in 2024, plus a catch-up contribution of $7,500 if you’re age 50 or older. The limit on your contributions as an employer is 25% of your employee compensation from the business, up to $69,000, plus a catch-up contribution of $7,500 if you’re age 50 or older.
The IRS has a formula for calculating earned income for the purpose of determining your contribution limits. The formula can be tricky and mistakes can be costly, so consider talking with a financial advisor or accountant before you begin contributing to a solo 401(k) account.
A 403(b) retirement plan works similarly to a 401(k), but 403(b)s are available to employees of public schools, churches, and 501(c)(3) nonprofit organizations. Like 401(k) contributions, 403(b) contributions are made pre-tax, allowing the funds to grow tax-deferred inside the account until withdrawal, when taxes are paid. Some employers also offer Roth 403(b) options, where contributions come from after-tax income but can be withdrawn tax-free in retirement.
Annuities are contracts between you and an insurance company where you pay a lump sum or installments upfront and in return, the insurer provides you with periodic payments and possibly a death benefit. You can receive the payout as a lump sum or as a series of payments. There are three main types of annuities:
Indexed annuity – Returns are linked to a stock index like the S&P 500.
Fixed annuity – Provides a fixed interest rate on your funds and scheduled payments of a set dollar amount.
Variable annuity – Allows you to invest your funds which grow tax-deferred at a variable rate.
Annuities have fees and risks to consider before purchasing. While only variable annuities are securities, consulting an independent fee-only financial advisor can help determine if any annuity is right for your situation.
9. Defined benefit plan
A defined benefit plan is the type of retirement plan traditionally associated with pensions, in which employees receive a fixed, predetermined benefit upon retirement. The benefit is typically a set dollar amount, or a percentage of salary determined by years of service. A key advantage is that employers largely fund defined benefit plans, and the payout amount is guaranteed employers cannot retroactively reduce benefits, per IRS rules. Most defined benefit plans provide lifetime annuity payments for retirees and their spouses.
Choosing from the many retirement account types can feel overwhelming, but selecting the right one is crucial. If your employer offers a specific retirement plan, you may be limited to that option. Otherwise, consider your current needs (like investment options and tax benefits) as well as your future needs in retirement when deciding on an account. Focus on picking the retirement account that best aligns with your financial goals and expected lifestyle after you stop working.
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