Get the Best Retirement Account(s) for Your Situation

Thursday, May 6, 2021 | Melissa Brock
Get the Best Retirement Account(s) for Your Situation

You may feel super overwhelmed by your retirement account options. However, paralysis by indecision can wreak havoc on your future. 

Instead of paralysis, imagine feeling complete peace of mind because you know your money will work for you until you want to retire.

Best if You Have a 401(k) Option at Work

The best reason to tap into your 401(k) option at work: The company match. This simply means that if you contribute a certain amount to your retirement, your company will also contribute a specific amount of money to your account as well. The bottom line: You get money from your employer — for free! Why wouldn't you use it?

What is a 401(k), anyway? It's an employer-sponsored retirement account that lets you deduct a percentage of your salary to a retirement account. Your company will offer you the option to invest in stocks, bonds, mutual funds and more. Two popular options include the traditional 401(k) and the Roth 401(k).

Traditional 401(k) 

When you invest in a traditional 401(k), you can elect to invest a percentage or specific dollar amount into your account pre-tax through your employer. The money is tax-deferred, which means you pay taxes on contributions and earnings when you withdraw the money in your account upon retirement. 

Roth 401(k)

An employer-sponsored Roth 401(k) functions exactly the same way as a traditional 401(k), except for one major change. You do not make tax-deferred contributions. Instead, you make contributions with after-tax dollars. Any income, dividends, or capital gains you earn grow tax-free.

Best for Self-Employed or Gig Workers

Gig workers deserve a special spot in this article due to the sheer number of them. Between 2003 and 2013, all industry sectors showed growth in nonemployer businesses, according to the Bureau of Labor Statistics. The “other services” sector gained nearly 1 million nonemployer businesses during that time, which includes on-demand services related to gig employment.

You may have to possess even more drive to sign up for the right retirement plan for you because nobody will wave a form under your nose or give you a presentation at work. Check out three types below — a SEP IRA, SIMPLE IRA or Solo 401(k) to determine which works best for you.

SEP IRA

The Simplified Employee Pension plan, or SEP IRA, lets employers (individuals, sole proprietors, and small business owners) contribute. 

The SEP IRA offers a tax-advantaged retirement savings option that grows tax-deferred until retirement. This means that when you take money out of the account at retirement, your money gets taxed as income. 

SIMPLE IRA

The SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Accounts works well for small businesses with 100 or fewer employees. If you have employees, they can participate in the plan if they made at least $5,000 during any of the two previous years and will make at least that much during the current year.

Individual 401(k)

An individual 401(k), or Solo 401(k), is ready-made for a business owner with no employees. IRS rules state that you can’t contribute to an individual 401(k) if you have full-time employees. However, you can contribute for both you and your spouse.

You can contribute to your solo 401(k) as both an employer and employee. 

Best for Workers with No 401(k) Option 

If your employer doesn't offer a 401(k), you should lobby for the company to get one! Your employer can benefit from a lot of great reasons to offer a retirement plan — including employee retention!

In the meantime, before your lobbying efforts work, turn to an IRA, which aren't tied to your employer. Anyone who earns an income can get an IRA. 

Roth IRA

I like to think of Roth IRAs as the granddaddy of all retirement accounts. Put simply, you pay taxes today and your Roth IRA grows tax-free. You also get to withdraw it tax-free as well. This offers a very simplistic overview but we'll dive into more details in a second!

Traditional IRA

Again, a really simplistic approach to defining a traditional IRA: You put money in today and then pay the taxes when you withdraw it in retirement. 

Retirement Accounts Overview

You might still have questions: How much can I contribute? When does Uncle Sam tax me? When can I withdraw? Take a look at the answers to these questions and more! 


 

Traditional 401(k)

Roth 401(k)

SEP IRA

SIMPLE IRA

Individual 401(k)

Roth IRA

Traditional IRA

Who it's for

Employees with an employer plan

Employees with an employer plan

Small businesses and self-employed individuals

Small employers and employees

Business owners with no employees

Anyone who earns income

Anyone who earns income

Contribution limits

$19,500; those age 50 and older can tap into a $6,500 catch-up contribution

$19,500; those age 50 and older can tap into a $6,500 catch-up contribution

Limited to 25% of your net earnings: Up to $58,000

$13,500 or $16,500 for those 50 and over

Up to $58,000, with an additional $6,500 catch-up contribution if 50 or older

$6,000; those 50 or over can contribute $7,000

$6,000; those 50 or over can contribute $7,000

Tax treatment

Taxed at an individual's current income tax rate

Income earned from interest, dividends, or capital gains is tax-free.

Investment income is tax-deferred. Tax imposed when money is distributed from the SEP-IRA. 

Money grows tax-deferred until distributions at retirement

As employer: Tax-deductible to your business. Earnings grow tax-deferred until withdrawal.

Tax-free instead of tax-deferred upon withdrawal

Not taxed until you take a distribution (withdrawal)

Required minimum distributions

Age 72

Age 72

Age 72

Age 72

Age 70 ½ 

No required minimum distribution

Age 72


Get the Best Retirement Account for You

As we live into our 90s these days, you need to plan for a long retirement. Take advantage of plans that benefit you, tax-wise, and carefully consider whether you want a pre-tax or tax-deferred option.

Also, don't forget that you can have more than one. For example, you can combine a Roth IRA and traditional 401(k) or a traditional IRA and a Roth IRA. Why not? The more you save, the more you'll have when you retire.

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