When it comes to retirement planning, Americans are often way behind. In fact, in 2019, almost half of households headed by someone 55 or older had no retirement savings at all, according to the U.S. Government Accountability Office.
Many people won’t have enough money to live comfortably and will rely solely on Social Security to pay for their living expenses. But retirement doesn’t have to look this way for you.
Here’s everything you need to know about the best types of retirement plans available and how to decide which one is best for you.
Best Individual Retirement Plans
Not everyone has access to an employer-sponsored retirement plan. Even if you do have a retirement plan through work, like a 401(k), you may want to save additional money beyond the annual 401(k) contribution limits. If that’s the case, some of the best retirement plans for saving on your own are Individual Retirement Accounts (IRAs) and annuities.
Traditional IRA
Anyone who earns taxable income can open a traditional IRA. If you don’t have a retirement plan through work, the contributions you make to a traditional IRA are usually tax-deductible. Contributions to a traditional IRA may be invested in a range of different assets, like mutual funds and ETFs, and the investment earnings are tax-deferred. Once you start making withdrawals after age 59 ½, your IRA distributions are taxed as ordinary income.
In 2020, you can contribute up to $6,000 per year into a Traditional IRA. If you are 50 years of age or older, you can contribute up to $7,000 per year.
Roth IRA
If your annual income isn’t too high, a Roth IRA is one of the best retirement accounts available. While your Roth IRA contributions aren’t tax-deductible today, you don’t have to pay income taxes on the withdrawals you make once you retire. Plus, you can take out the money you contribute to a Roth IRA before retirement without paying a penalty, so your Roth IRA can also double as an emergency fund in a bind.
The amount you can contribute to a Roth IRA depends on your income. You can only contribute to a Roth IRA in tax year 2020 if you earn less than $139,000 or less than $206,000 if you’re married and file a joint tax return. For tax year 2021, the income thresholds are $140,000 for individuals and $208,000 for married couples.
Spousal IRA
A spousal IRA isn’t really a special type of individual retirement account. Rather, it’s a strategy married couples can use to maximize their retirement savings using an IRA.
can open up a traditional or Roth IRA in their own name and make contributions based on their household income. Ordinarily, you are limited to contributing the amount you, not your household, earns in a year.
Being able to open another IRA—and max out the account with contributions—allows some married couples to double their IRA retirement savings each year.
Fixed Annuities
An annuity is a type of insurance contract that can supplement your retirement savings. There are many forms of annuities to choose from, but we believe that fixed annuities are your best choice.
Fixed annuities are easier to understand and compare to one another than some different kinds of annuity contracts, like indexed or variable annuities. Fixed annuities generally have predictable benefits, tax-deferred growth and, in some cases, a death benefit that can be paid out to a beneficiary if you pass away.
And, unlike other retirement plans, annuities aren’t subject to IRS contribution limits, so you can invest as much as you want for your future.
Best Employer-Sponsored Retirement Plans
Of all of your job benefits, your employer-sponsored retirement plan is probably one of the most valuable.
According to MetLife’s 2019 Employee Benefit Trends Study, employees ranked a 401(k) or other retirement plans as the most important company benefit after health and dental insurance, with 60% of respondents saying a retirement plan was a “must-have” when considering a prospective employer.
If your employer offers a plan to help you save for retirement, you should almost certainly opt-in because they can really help you jumpstart your retirement savings. But where you work will affect what kind of retirement options you have.
Traditional 401(k)
If your employer offers a 401(k) account, you can make contributions to the plan with pre-tax dollars. Your investments grow on a tax-deferred basis, meaning you don’t pay taxes on the what you invest or its earnings until you make withdrawals in retirement.
Employers may incentivize employees to contribute to their 401(k) plans by matching a portion of their contributions, up to a percentage of their salaries. For 2020 and 2021, the contribution limit for 401(k) accounts is $19,500 per year, or 100% of your compensation, whichever is less. If you are 50 or older, you can make a catchup contribution of $6,500. Any employer contributions do not count toward this limit.
Note: If your employer offers a 401(k) plan, the minimum age to participate cannot be higher than 21 and it cannot require more than a year of service to participate.
Roth 401(k)
Many employers offer a Roth 401(k) option as part of their 401(k) plan. With a Roth 401(k), your contributions are after-tax dollars rather than pre-tax dollars, and the withdrawals you make in retirement are not taxed as income. Roth 401(k) accounts have the same contribution limits as Traditional 401(k) accounts. If your employer offers a 401(k) match and you contribute to a Roth 401(k), you are still eligible to receive the match. It will, however, be deposited into a Traditional 401(k) for you because of federal regulations.
The key to deciding between a Roth or Traditional 401(k) is determining when you believe your taxes will be lower: Now, while you’re making contributions to your 401(k), or years from now, when you’re making withdrawals in retirement.
If you think your income taxes are higher today, contribute to a Traditional 401(k) account and benefit from lower taxes on withdrawals in retirement. If you think you’re probably in a lower tax bracket today than you will be in retirement, a Roth 401(k) account is a better choice for now.
Note: If your employer offers a 401(k) plan, the minimum age to participate cannot be higher than 21 and it cannot require more than a year of service to participate.
403(b) plan
If you work for a public school or a non-profit organization, your employer may offer a 403(b) retirement plan, also known as a tax-sheltered annuity or TSA plan. If you’re eligible to contribute to a 403(b) account, you make contributions from your paycheck on a pre-tax basis, and your money grows tax-free until you make withdrawals in retirement. Some 403(b) plans allow Roth accounts; these work like Roth 401(k)s.
In 2020 and 2021, the contribution limit for 403(b) accounts is $19,500, or 100% of your compensation, whichever is less. If you are 50 or older, you can make catchup contributions and contribute an additional $6,500 per year. Like a 401(k), employers may also make contributions to your account. These do not count toward your contribution max.
457(b) plan
If you are an employee of a state or local government agency, you may be able save for retirement in a 457(b) plan. Like a 401(k) plan, a 457(b) allows you to invest pre-tax money from your paycheck in your retirement account. The account is tax-deferred, so you don’t pay taxes on your contributions or earnings until you begin to make withdrawals in retirement. Some 457(b) plans allow Roth accounts; these work like Roth 401(k)s.
In 2020 and 2021, you can contribute up to $19,500 per year, or 100% of your compensation, whichever is less.
Thrift Savings Plan
A Thrift Savings Plan (TSP) is only for federal employees and members of the uniformed services. TSP accounts work similarly to corporate 401(k) plans. You can make contributions to a TSP with pre-tax dollars, and your money can grow tax-deferred until you withdraw it in retirement. Some TSPs allow Roth accounts that work like Roth 401(k)s.
In 2020 and 2021, the annual contribution limit is $19,500. If you are 50 or older, you can contribute an additional $6,500 per year.
What About Defined Benefit Plans?
Defined benefit plans—commonly known as pension plans—used to be fairly commonplace but are increasingly rare. According to a study by Willis Towers Watson, only 14% of Fortune 500 companies offered defined-benefit plans to new hires in 2019, a decrease from 59% of Fortune 500 companies in 1998.
With a defined benefit plan, employees receive a fixed, pre-set benefit when they retire. They have a predictable and reliable source of income in their retirement, and their benefits aren’t dependent on investment returns or market growth.
Defined benefit plans tend to be more expensive and complex for employers to operate, so many companies are opting to offer alternative retirement plans instead, such as 401(k)s.
Best Retirement Plans for Small Businesses & the Self-Employed
Self-employment is increasingly popular in the United States. According to the Pew Research Center, in 2019 16 million Americans were self-employed, and 29.4 million people worked for self-employed individuals, accounting for 30% of the nation’s workforce.
Being a small business owner or a solo entrepreneur means you’re on your own when it comes to saving for retirement. But that doesn’t mean you can’t get at least some of the benefits available to people with employer-sponsored retirement plans.
Whether you employ several workers or are a solo freelancer, here are the best retirement plans for you.
SIMPLE IRA
If you are a small business owner and don’t have another retirement plan for your employees, consider a Savings Incentive Match Plan for Employees IRA (SIMPLE IRA). With a SIMPLE IRA, you must make contributions for each of your employees. Your contributions must meet one of the following requirements:
- Match your employee contributions, up to 3% of their total compensation.
- Contribute 2% of your employees’ salaries, even if they don’t make contributions themselves.
Under a SIMPLE IRA, employees are immediately vested, meaning they have full ownership of all of the funds in their accounts. Contributions made by your business can be deducted from its taxes. In 2020 and 2021, employees can contribute up to $13,500 a year ($16,500 for those 50 and older).
SEP IRA
If you’re a small business owner, you can open a Simplified Employee Pension (SEP) plan. Don’t be confused by the name, SEPs are defined-contribution retirement plans. Simplified Employee Pension plans establish SEP IRAs for self-employed individuals and small business owners. Employers who have SEP plans must offer them to all employees who earn at least $600 per year from the business, who have worked there at least three out of the last five years and who are at least 21.
Unlike other retirement plans, your employees can’t make contributions to the SEP IRA; only the employer can. In 2020, you can contribute up to 25% of your employee’s compensation or $57,000, whichever is less. In 2021, you can contribute up to 25% of your employee’s compensation or $58,000. An important note: If you are a business owner and contributing to your own SEP, you must contribute the same percentage to all of your employees’ SEP IRAs. Contributions made by your business can be deducted from its taxes.
Payroll Deduction IRA
A payroll deduction IRA is a low-cost option that requires little work on the part of a small business owner. With this option, your employees open IRAs with a financial institution of their choice, and then they authorize payroll deductions to fund their IRAs.
As a small business owner, your sole responsibility is simply to deduct the employee’s authorized deductions from their paychecks and direct them to their designated IRA account.
Only employees make contributions to the account, and there are no filing requirements for the employer. Payroll deduction IRAs are easy to set up and operate, and there is little to no cost for the employer. Employees can contribute up to normal IRA limits in tax years 2020 and 2021: $6,000, or $7,000 for those 50 or older.
Solo 401(k)
If you’re self-employed and don’t have any employees, besides a spouse who works at least part time, you can open a Solo 401(k) account. Like other types of 401(k)s, you can choose between a traditional Solo 401(k) and a Roth Solo 401(k).
With a Solo 401(k), you can make contributions to the account as both an employer and an employee. This may allow you to contribute more to this retirement than any other as a self-employed person.
As an employee, you can contribute up to $19,500 per year ($26,000 if you are 50 or older). As an employer, you can contribute up to 25% of your compensation. Total contribution from yourself as an employee and an employer cannot exceed $57,000 for 2020 or $63,500 if you are 50 or older. This total rises to $58,000 or $64,500 if you are 50 or older in 2021. Contributions are deductible from your business’s or your own taxes, based on whether you are contributing as an employer or employee.