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 and 2021, 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 total annual Roth IRA contribution limits are the same as for a traditional IRA, although there are income thresholds that limit who may contribute directly to a Roth IRA. You may only contribute directly 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.
If you’re married and you or your spouse doesn’t work or earns significantly less than the other, a spousal IRA allows you to save more for retirement. The non-working spouse 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…