You’ve probably heard about the importance of saving for retirement for much of your adult life, but what are the best retirement accounts to consider? It’s never too late to start a retirement plan — seriously. You may have been putting aside money for years, but that doesn’t mean you can’t change your strategy as you get older. The rules for your plans, such as how much you can contribute or withdraw, change when you hit certain ages. You may want to open a different type of account for your retirement savings.
There are plenty of options to consider when trying to figure out how to retire comfortably, from an IRA to a 401(k). But it can get confusing when you’re trying to go it alone, and savings strategies aren’t one-size-fits-all. Your current savings, employment situation and future goals all play into what account is best for you. Consider this your quick-and-simple guide to retirement savings plans and accounts.
The 401(k) is one of the most common retirement savings accounts and often considered one of the best retirement accounts. A traditional 401(k) is offered through employers. You can defer a portion of your paycheck into an individual account, and your employer may contribute as well. A major perk: Generally, the wages you set aside are not considered taxable income, according to the Internal Revenue Service.
If you are under 50 years old, you can contribute up to $19,500 in 2021. However, individuals over 50 can set aside even more — up to $26,000.
There’s another type of 401(k) that’s not as prevalent but still offers benefits. These retirement savings accounts are known as a solo 401(k). This plan is ideal if you own a business without employees, such as a boutique consulting firm. You can contribute up to $58,000 to a solo 401(k) each year. People who are 50 years and older can make “catch-up” contributions of up to $6,500. If you are 50 or older and have more now than you did when you were younger, this allowance gives you the opportunity to bolster your retirement savings.
The 403(b) is similar to the 401(k), except it’s generally offered by public schools, churches and tax-exempt charitable organizations. Employees defer a portion of their salary and accumulate tax-free earnings until they withdraw them, which, for obvious reasons, makes this another of the best retirement accounts. These accounts offer flexibility in how much employees want to defer. In 2021, you can contribute up to $19,500 if you are under 50 years old. If you are 50 and over, you can defer up to $26,000.
The 457(b) is the typical retirement savings plan offered by state and local governments and winds up on our list of best retirement accounts for similar reasons as the others that we’ve discussed.
Similar to a 401(k) and 403(b), people under 50 can set aside up to $19,500 and those 50 and older can contribute up to $26,000. These contributions are tax-deferred. Sometimes, you may need to withdraw funds, such as to pay for a high medical bill. You can do this before age 59 years and six months without penalty.
Individual retirement accounts (IRA) are retirement savings plans not offered through employers. You can actually have an IRA and 401(k), 403(b) or 457(b). These accounts also provide tax benefits, and there are several to consider them on your list of best retirement accounts.
You can only have a traditional IRA if you have earned income (wages, salary, tips or other taxable income). The IRS allows you to put in $6,000 if you’re under 50 or $7,000 if you are 50 and older. You receive a tax deduction on your contributions, but any money you withdraw is taxable income. After your 72nd birthday, you need to begin withdrawing distributions from the account. A financial advisor can walk you through this process.
Roth IRAs are similar to traditional IRAs. Only individuals with earned income are eligible, and the contribution limits are the same. You do have to pay taxes on your contributions, though. But the money accumulates in a tax-free account, and you won’t have income tax due on your Roth IRA during retirement. You also don’t have to take distributions in retirement, so you can leave it in the account and potentially leave the funds to loved ones when you pass, which is another reason people have this on their list of best retirement accounts.
Self-directed IRAs are similar to traditional IRAs in terms of contribution limits and eligibility. The big difference is that you can place your money into other assets, like precious metals and real estate.
Simple IRAs are typically eligible to employees of businesses with 100 employees or less. You need to have earned at least $5,000 with the company in the previous two years and expect to make at least $5,000 the year you want to sign up. Your employer must put money into this account, increasing your savings opportunities. You can contribute up to $13,500 yourself and make a catch-up contribution if you are at least 50 years old. Your income is deducted from your taxable income. However, there are some caveats: Any withdrawn funds are taxable, and you may be penalized if you dip into it before age 59 1/2.
Medical costs can build up as we age. If you’re concerned about this, you may want to look into a health savings account (HSA) when considering the best retirement accounts. These accounts allow you to set aside money to pay for health costs when you retire. In order to sign up, you must have a high-deductible health insurance plan. The IRS allows you to put a maximum of $3,600 into your HSA as an individual and up to $7,200 if you are on a family plan. Individuals 55 and older can put in an extra $1,000. The money you put away is tax-deductible, grows tax-free and can be taken out tax-free as long as it’s used to pay for medical expenses.
There are many ways to save for retirement, and the best approach for you will depend on your concerns, goals and current savings. Above, we’ve listed 5 of the best retirement accounts and you should consider them all. Speaking to your employer’s HR representative or a financial advisor can help you navigate retirement savings plans and help you make the right choice for your specific circumstances.
The most important note? It’s never too early and it’s never too late to start saving with one of the best retirement plans.