Do you have a plan in place for your retirement?
For many people, the extent of their retirement planning includes signing up for the plan at work – which is often more of a starting point than a comprehensive retirement plan.
Let’s demystify the lingo and break down some of the most common retirement plans, so you can determine the best retirement plan for you:
Common Retirement Accounts
Whether you work for a large company, a small business, or yourself, there are retirement savings accounts that will work best for your situation. Here are some of the most common ones:
- 401(k) – A 401(k) is a retirement plan available through employers for employees. There are traditional and Roth 401(k)s, both differentiated by their tax benefits.
- Traditional 401(k) – Employee contributions reduce taxable income, but withdrawals in retirement are taxed.
- Roth 401(k) – Contributions are made with after-tax income, so while there isn’t a tax deduction for the year you make a contribution, qualified withdrawals are tax-free.
- Some employers offer 401(k) matches, meaning they will match a percentage of your contributions.
- 2024 contribution limit: $23,000
- 403(b) – A 403(b) plan is a retirement plan offered by public schools and some charitable organizations. Like a 401(k), a 403(b) plan lets employees put some of their salary into an account, and it’s generally not taxed until it’s distributed. If you prefer a Roth, some 403(b) plans may also offer Roth accounts, and those contributions are tax-free when distributed.
- 2024 contribution limit: $23,000
- 457 plan – A 457(b) deferred compensation plan is available to the employees of some state and local governments and tax-exempt organizations. Contributions to a 457(b) plan are tax-deferred, and so are the earnings on the retirement money. Some 457 plans can allow for Roth contributions and in-plan rollovers. There are also 457 plans available for some private companies. Keep in mind that this is not an individual account, so it must remain “unfunded,” i.e. it isn’t financed. That means that the assets remain the property of the employer, and can be available to creditors in the event of bankruptcy or other litigation.
- 2024 contribution limit: $23,000
- Thrift Savings Plan – The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services. It allows you to put up to 11 percent of your salary before taxes toward your retirement, and you do not pay income tax on that money until you retire. It also allows for an IRS match up to 4 percent.
- 2024 contribution limit: $23,000
- Individual Retirement Account (IRA) – An IRA is an Individual Retirement Account, so it is not tied to an employer. The ability to deduct your IRA contribution (i.e. take the tax benefit) depends on whether you are eligible to contribute to a plan at work, and how much income you will make. Always check what the current’s year’s income limits are before you contribute (for 2024, it is $7,000, or $8,000 for those aged 50 or older.) There are traditional IRAs, and Roth IRAs.
- Traditional IRA – Contributions are pre- or after-tax dollars, and your money grows tax-deferred. Your withdrawals are taxed as current income after age 59½.
- Roth IRA – Contributions are made after taxes are taken out, and your money grows tax-free. You can (usually) make tax- and penalty-free withdrawals after age 59½.
Small Business Entry Level Accounts
- SEP IRA – A Simplified Employee Pension (SEP) IRA is a traditional IRA for anyone who is self-employed, has employees, or earns freelance income. In 2024, employer contributions cannot exceed the lesser of 25 percent of the employee’s compensation, or $69,000.
- SIMPLE IRA – A Savings Incentive Match PLan for Employees (SIMPLE) IRA allows employees and employers to contribute to traditional IRAs set up for employees, and is often used by small businesses. In 2024, the annual contribution limit for SIMPLE IRAs is $16,000, plus catch-up contributions of $3,500 if you are 50 or older.
Choosing the Best Plan as an Employee
There is no one-size-fits-all retirement plan that works for everyone. Your best retirement plan comes from understanding your needs now and later, and making the most of your income and savings power.
If you have a 401(k), you can split your maximum contribution between a pre-tax 401(k) to get the tax break now, and the Roth 401(k) to get the tax benefits later. This is called tax diversification, and it allows you to have much more flexibility about which bucket you take your money out of in retirement.
Depending on income, you can also use IRAs for more tax benefits if you’re already maxing out your 401(k).
If you’re a household earning more than $250,000, a 401(k) alone might not be enough to support your retirement needs. You can use multiple accounts to help boost your savings.
Choosing the Best Plan if You’re Self-Employed (or your company doesn’t offer a retirement plan)
If you don’t have a retirement plan at work or you work for yourself, your best bet is to contribute to either a Roth IRA or Traditional IRA, as long as your income falls into the ranges set by the IRS.
But if you need to be saving is more than what the IRS plan limits allow, consider opening up a low-cost brokerage account and putting the additional savings into tax-efficient investments, like low cost mutual funds or ETFs. If you don’t have a retirement plan because you work for yourself, you actually have more options, like a SEP, SIMPLE or a Solo 401(k) for small businesses.
How Much Should You Be Saving?
If you are someone who genuinely enjoys your career, and you think you’ll be working well into your 60s, then you won’t have to save as much as someone who has their heart set on retiring at 50.
Additionally, someone who wants to spend their retirement at home is going to have different needs than someone who plans to travel the world.
Ask yourself:
- How much are you putting toward retirement right now?
- What are your debts and assets?
- What will your annual expenses during retirement be?
- How many years from now do you plan to retire? (i.e. If you plan to retire at 55, you’ll need a lot more than if you retire at 65.)
- Do you or your spouse have any health concerns or long-term health needs?
- How much money do you want to leave to your family, friends or charity when you pass away?
That will help you get started with a target number, and from there, you can see which accounts will support your goals. Here is a retirement calculator to help you estimate your needs.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.
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