Find the Best Retirement Plan for You

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Updated on Friday, December 21, 2018

Saving for retirement seems like a relatively straightforward goal: You know you’ll need money later — so you should save for it now, right? According to a recent Gallup poll, 46% of those not yet retired don’t believe they’ll be financially comfortable when they retire. That means almost half the population wish they were saving more! Part of saving money is knowing where to keep it — and that’s a crowded marketplace! Plus, you also have to consider that you can use more than one retirement account — either throughout your lifetime or at the same time. For instance, you might start out contributing to a Roth 401(k) and move to a 401(k) as your income grows. Or, if you’re a freelancer, you might have a SEP IRA and a Roth IRA at the same time. Anyone with a high deductible health plan can also save to an HSA.

If you’re not sure what retirement plan will get you to the finish line, read on for guidance.

Find the best retirement plans for you. (You’ll find a detailed description of each plan below.)

If you areConsider this
A young worker with modest incomeRoth 401(k)
Eligible for an employer-sponsored plan401(k), Roth 401(k), 403(b), 457(b)
Not covered by an employer-sponsored plan and not self-employedTraditional IRA
Making a modified adjusted gross income of under $137,000 if single or under $203,000 if married and filing jointly (2019)Roth IRA
A freelancer with no employeesSEP IRA, SIMPLE IRA or Solo 401(k)
Nearing retirement age401(k)*, Roth 401(k), HSA
Covered by a high deductible health planHSA
*or 403(b) or 457(b)

401(k) or 403(b)

  • Best for: Any worker whose employer offers a retirement savings account.
  • Contribution limits: $19,000 per year for 2019 if you’re under 50; $25,000 if you’re 50 or older.
  • How it’s taxed: The money goes in pre-tax and you’re taxed on distributions in retirement.

What else you need to know: With a 401(k) or 403(b), you elect to save a certain percentage of your income each year and the money comes out of your paycheck (pre-tax). Many employers offer to match contributions. For example, they might match the first 6% you save at 50%, meaning they’ll contribute 3%. A 401(k) or 403(b) is one of the best and easiest ways to save for retirement since the money gets saved automatically.

457(b)

  • Best for: Any government worker whose employer offers a retirement savings account.
  • Contribution limits: $19,000 per year in 2019 if you’re under 50; $25,000 if you’re 50 or older.
  • How it’s taxed: The money goes in pre-tax and you’re taxed on distributions in retirement.

What else you need to know:
This account works a lot like a 401(k) or 403(b), but it’s specific to state and local government workers. One major difference is that if employers match, their contributions count toward the limit on the plan. Another notable difference is that some plans allow employees to make extra contributions beginning three years before the “normal retirement age,” which is detailed in the plan. The formula used to compute the catch-up amount can be complicated, and some plan administrators simply don’t offer the option.

HSA

  • Best for: Anyone with a high-deductible health plan.
  • Contribution limits: Up to $3,500 per year in 2019 for an individual and $7,000 for a family if you’re under 55. Up to $4,500 for an individual and $8,000 for a family if you’re 55 and older.
  • How it’s taxed: Contributions go into the account pre-tax and if the money is used for eligible medical expenses, distributions are tax-free.

What else you need to know:
If your healthcare is covered by a high-deductible health plan (HDHP), you’re eligible to use a Health Savings Account. The money you save to an HSA is tax-free on both sides (contribution and distribution) as long as it’s used for eligible medical expenses, such as co-pays, prescriptions and other medical bills. The money rolls over each year, so there’s no time limit on using the funds you’ve saved. You can contribute to an HSA at any point up to your tax filing deadline for that tax year.

“Most people aren’t going to itemize their deductions anymore, so they’re not going to get any kind of write-off for medical expenses until they get to a very high level,” said Linda Farinola, a financial planner in Princeton, N.J. “The change in the tax law makes HSAs more attractive.”

Roth 401(k)

  • Best for: Young workers making a more modest income and older workers with a sizable pre-tax retirement nest egg.
  • Contribution limits: $19,000 per year in 2019 if you’re under age 50; $25,000 if you’re 50 or older.
  • How it’s taxed: Your contributions are post-tax, but distributions in retirement are tax free as long as you’re 59 and a half and the funds have been in the account for five years or more.

What else you need to know:
Unlike a Roth IRA, there’s no income cap on who can contribute to a Roth 401(k). The advantage of a Roth 401(k) is that you can save more than three times the allowable amount for a Roth IRA. That being said, no employer matching funds can be contributed to a Roth 401(k), so you’ll want to ensure you’re contributing enough to a regular 401(k) to get any employer match before you elect to save anything else to a Roth.

“It’s really more about money than age when selecting the right 401(k),” said Rose Swanger, a financial planner in Knoxville, Tenn. “For young folks who work in Silicon Valley, a traditional 401(k) may be deemed a better option than a Roth because it helps them lower the tax. On the other hand, for the majority of the folks who just started their career, a Roth 401(k) should be a good starter.”

Roth IRA

  • Best for: Young workers making a modest income. “They’re not really paying that much in taxes now anyway, so they’re not going to get a lot of benefit from the tax deduction now,” said Farinola. It’s also a good idea for older workers with a sizable pre-tax retirement nest egg.
  • Contribution limits: $6,000 per year if you’re under age 50, $7,000 if you’re older than 50.
  • How it’s taxed: Your contributions are post-tax, but distributions in retirement are tax-free as long as you’re 59 and a half and the funds have been in the account for at least five years.

What else you need to know:
To contribute to a Roth IRA account, you must make less than $137,000 as a single person in 2019, or $203,000 if you’re married filing jointly. A Roth account is your best option if you think your taxes are lower than they’ll be in retirement. Younger workers have time on their side, which means their savings can grow tax-free before they withdraw them. A Roth IRA provides income flexibility for older employees who have a large amount of pre-tax savings and high income (and taxes) in retirement. You can also convert a traditional IRA to a Roth no matter your income level.

SEP IRA

  • Best for: Freelancers or small business owners with employees.
  • Contribution limits: You can save up to 25% of your gross annual salary or what equates to about 20% of your adjusted net earnings from self-employment, up to a maximum of $56,000 in 2019.
  • How it’s taxed: Like a traditional IRA, contributions are pre-tax, and distributions are taxed at your income rate at the time of distribution.

What else you need to know:
Because you’re limited to a percentage of your income, a Simplified Employee Pension IRA can be limiting if you’re trying to put more money away. Business owners with employees must save the same percentage of compensation to their SEP IRAs as they do to theirs—so it can be an expensive benefit to offer if you’re hoping to save aggressively for your retirement. If you’re a freelancer, it’s one of the simplest accounts to set up and maintain for yourself.

SIMPLE IRA

  • Best for: Freelancers or small business owners with employees.
  • Contribution limits: Employee contributions (you) cannot exceed $13,000 in 2019 if you’re under 50, or $16,000 if you’re older than 50. Employer contributions (also you) are generally required to match employee contributions on a dollar-for-dollar basis, up to 3% of the compensation.
  • How it’s taxed: Contributions are pre-tax while distributions are taxed at your income rate at the time of distribution.

What else you need to know:
If you’re a small business owner with employees, a SIMPLE IRA (Savings Incentive Match PLan for Employees) allows you and your employees to save for retirement, but your contribution to your account doesn’t have to match theirs (a more reasonable option). If you’re making a modest income, a SIMPLE IRA might let you put more away than you can with a SEP IRA. However, if you’re above a certain income threshold, both the SEP IRA and Solo 401(k) will allow you to save more. (Try this calculator if you’re unsure.)

Solo 401(k)

  • Best for: Freelancers or sole proprietors with no employees except a spouse.
  • Contribution limits: Employee contributions (you) are limited to $19,000 in 2019 if you’re under 50, or $25,000 if you’re older than 50. Employer contributions (also you) are limited to 25% of gross income for corporations or about 20% of net income for a sole proprietorship, not to exceed $56,000. Total contributions cannot exceed $56,000 if you’re under age 50; $62,000 if you’re 50 or older.
  • How it’s taxed: Contributions are pre-tax and distributions are taxed at your income rate at the time of distribution.

What else you need to know:
You can only open this account if you have no employees other than a spouse, but the Solo 401(k) gives you the most flexibility in terms of self-employed retirement savings.

“If you’re self-employed and you have no employees, typically the Solo 401(k) makes sense from a financial perspective,” said Howard Hook, a financial planner and CPA in Princeton, N.J. “Because you can save, dollar for dollar, whereas with a SEP it’s a percentage of your salary.” In other words, if you make $18,500 in net earnings, you can save $18,500. A Solo 401(k) does involve more paperwork, but it’s not drastic.

Traditional IRA

  • Best for: Non-self-employed workers without employer-sponsored retirement accounts.
  • Contribution limits: $6,000 per year in 2019 if you’re younger than 50; $7,000 if you’re older than 50.
  • How it’s taxed: If you and your spouse aren’t covered by a retirement plan at work, contributions to a traditional IRA are fully deductible, and you’ll be taxed on distributions. If you or your spouse are covered by a work retirement plan, deductibility depends on your income, and in some cases, it won’t be deductible at all.

What else you need to know:
A traditional IRA can be a good savings option if you don’t have a retirement plan at work—but experts don’t recommend saving to one if it won’t be deductible. If you do, you must keep track of how much of your IRA is made up of post-tax funds so you won’t be taxed on them again in retirement.

“I see too many people who forget they have after-tax money in there,” said Farinola. “There’s a way to keep track of it as years go by in your tax return each year, but not everybody does, especially people who do their own taxes.”

Some financial planners will make exceptions (by allowing people to contribute to a non-deductible IRA) for high-income earners looking to contribute to a Roth. They can save to a traditional IRA (whether it’s deductible or not) and then convert to a Roth as needed, even if they make too much income to contribute to a Roth IRA. “We call that a backdoor Roth,” added Farinola.

Bottom line

There are multiple ways to save for retirement. Choosing the best account for you will depend on whether you have access to an employer-sponsored plan and how much you want to put away.

A financial planner can help ensure you’re maximizing your retirement savings, but in the end, it’s important to save no matter the amount. “Overall, people are not saving enough,” said Darin Shebesta, a financial planner in Scottsdale, Ariz. “Putting the money away in any account is better than spending it.”

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