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- The best retirement plans for individuals are traditional IRAs, Roth IRAs, and spousal IRAs.
- The best employer-sponsored retirement plans are 401(k)s, 403(b)s, 457(b)s, and thrift savings plans.
- The best retirement plans for self-employed individuals and small businesses are solo 401(k)s, SEP IRAs, SIMPLE IRAs, and payroll deduction IRAs.
- Most retirement savings vehicles offer multiple tax advantages that typically vary based on your employment and tax filing status.
- See Business Insider’s picks for the best IRA accounts »
- Use Blooom to analyze your 401(k) today and see how you can grow your retirement savings »
The best retirement plan depends on your individual situation.
If you have taxable income or work for an employer, you’ll probably qualify for multiple retirement savings vehicles. And even if you don’t work, you’ll still have options. You can set up most retirement accounts through employers, but you’ll also be able to open and manage your own individual retirement accounts.
The four primary types of individual retirement plans are:
And on the employer-sponsored end, the type of employer you work for determines which retirement plan you’re eligible to open. Your options are:
- 401(k) plans: traditional or Roth, typically offered by for-profit employers
- 403(b) plans: available to most non-profit employees
- 457(b) plans: reserved for government employees
- Thrift savings plans: reserved for government employees
If you’re a self-employed individual, you can’t use the traditional 401(k) account. Instead, you’ll have to pick a solo 401(k) or SEP IRA (you can supplement either account with an IRA if you choose).
In addition, small businesses typically have the following options for retirement plans:
Keep reading to learn more about your options.
One of the most appealing components of independent retirement plans like IRAs is that you can open one as long as you’ve got taxable (earned) income. And even if you’ve got an existing employer-sponsored retirement account, you can usually set up a traditional IRA, Roth IRA, and other independent retirement accounts.
Traditional vs Roth IRAs
Traditional IRAs let you save with pre-tax contributions, while Roth IRAs allow you to contribute after-tax dollars toward your retirement savings. As long as you’re eligible (more on that below), experts generally recommend Roth IRAs for early-career workers who expect to be at a higher tax bracket in the future when they’re making withdrawals, and traditional IRAs for higher-income workers who could use a tax deduction today.
Traditional IRAs and Roth IRAs both share the same contribution and catch-up contribution limits. For 2020 and 2021, you can contribute up to $6,000 in annual contributions and up to $1,000 in annual catch-up contributions (if you’re age 50 or older).
The biggest difference between the two comes down to tax advantages and income limitations. The Roth IRA limits who can contribute, and how much.
For Roth IRAs, single filers can only contribute the maximum amount in 2021 as long as their modified adjusted gross income (MAGI) is less than $140,000.
You can find your MAGI by calculating your gross (before tax) income and subtracting any of your tax deductions from that amount to get your adjusted gross income (AGI). To calculate MAGI, you’ll need to add back certain allowable deductions. Allowable deductions that can be added back include passive income or losses, deductions for IRA contributions, rental losses, deductions for student loan interest, and more. Alternatively, you ask your accountant or use an online calculator like the one below:
Modified adjusted gross income (MAGI) Calculator
Married couples need to earn less than $208,000 a year in order to contribute the full amount (the 2020 income limitations were $139,000 for single filers and $206,000 for married couples).
You don’t have to worry about income limits for traditional IRAs. However, if you or your spouse are covered by a retirement plan at work, you’ll have to consider the income limits for tax deductible contributions. This is because both traditional IRAs and 401(k)s are funded with pre-tax dollars.
For instance, in 2021 single filers can deduct the maximum contribution amount ($6,000) if they make $66,000 a year or less. Married couples filing jointly can also make full deductions if they make $105,000 a year or less. The amount you can deduct phases out, or decreases, if your income exceeds these limits. While you can contribute to a 401(k) and traditional IRA at the same time, your ability to take a tax deduction for these contributions — across both accounts, combined — ends once you hit those income limits.
There’s also an option for married couples where one spouse doesn’t earn taxable income. Spousal IRAs allow both spouses to contribute to a separate IRA as long as one spouse is employed and earns taxable income. This account allows the nonworking spouse to fund their own IRA.
Both spouses can contribute $6,000 per year, plus an additional $1,000 each if they’re age 50 or older. This means two spouses together could contribute up to $14,000 per year with an IRA.
These accounts let you convert your existing employer-sponsored retirement plan into an IRA, something experts generally recommend doing when you leave a job for a few reasons — primarily because you have more control over the investment options in an IRA than in a 401(k), and also because it’s easier to consolidate your accounts for record-keeping.
Many online brokerages and financial institutions offer rollover IRAs, and some will even pay you to transfer your employer-sponsored plan to the IRA.
Employer-sponsored retirement plans are savings vehicles your employer provides. There are several types — including 401(k)s, 403(b)s, 457(b)s, and thrift savings plans — and in some instances, your employer will match a percentage of your annual contributions.
For-profit companies generally offer these plans, and most companies give you the choice between two versions: the traditional 401(k) or the Roth 401(k). Traditional 401(k)s grow with pre-tax dollars, but Roth 401(k)s rely on after-tax contributions, just like they do with IRAs. This means that you can either choose to pay taxes on your contributions up front, or take a potential tax deduction now and pay them later when you withdraw funds from your retirement account.
You can contribute up to $19,500 for both 2020 and 2021, and individuals age 50 and older can contribute additional “catch-up” contributions of $6,500. The maximum limit for employer and employee contributions is $57,000 in 2020. It’s $58,000 in 2021.
Many employers also offer a 401(k) match. This basically means that your company may match a certain percentage of your annual contributions. These matches vary for each employer and generally range from 3% to 6%. For instance, if you make $50,000 per year, and your company matches 50% of your 401(k) contributions up to 5% of your salary, you employer can contribute up to $1,250 per year.
However, if you’re employer matched 100% of your contributions up to 5%, you’d earn the other $1,250 per year, resulting in $2,500 total from your employer.
No matter how big the match, experts generally consider it to be “free money” and recommend taking advantage wherever possible, even if you only contribute enough to get the full match and nothing more.
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