What is the Best Retirement Account for Me?

If you haven’t yet considered your financial future, now is the time. Ideally, you should begin preparing for retirement as soon as you start earning a paycheck, but with so many investment options and risk factors it’s not always easy to distinguish what is the best retirement account for me. 

One of the most important investment strategies is a retirement plan, like a 401(k) or IRA. These plans allow you to save and grow your money in a tax-advantaged way. Some retirement plans have annual contribution limits, while others have employee requirements. Below we characterize the most common retirement plans along with their advantages, disadvantages, and monetary requirements.

Best Retirement Account for Me

401(k)

A 401(k) is a company sponsored retirement account that employees contribute to. Oftentimes the employer will also match the employees’ contribution up to a certain amount as an employee benefit. Traditional 401(k) contributions are pre-tax and taxed at withdrawal. Contribution limits adjust each year based on inflation, but as of 2022 the annual limit on employee contributions is $20,500 per year for workers under 50. Note that the contribution limit is for the employee’s contributions to the plan and is not applicable to the employer’s matching contributions.

ROTH IRA

Just like a traditional 401(k), a Roth IRA allows your savings to grow tax free. With a Roth IRA, however, you fund with after-tax money. An advantage of the Roth IRA is that you can withdraw your original contributions at any time without penalty since they were made with after-tax dollars. 

However, the best thing about a Roth IRA is that earnings from these contributions are not taxed. As long as you follow the withdrawal rules, withdrawing after age 59.5 and 5 years after the initial Roth account was opened, these earnings can be taken from the account tax free. Roth IRA’s also have some of the smallest contribution limits with just $6,000 a year for those under 50 or $7,000 a year for those 50 and above. 

Remember to keep income limits in mind if you’re considering a Roth IRA. Your Modified Adjusted Gross Income (MAGI) must be under $144,000 if filing single or $214,000 if married or filing jointly to be eligible to contribute. 

Traditional IRA

While a Roth IRA anticipates the consumer will be in a higher tax bracket than when he or she opened the account, a Traditional IRA is best suited for someone who will be in the same or lower tax bracket when withdrawals begin. 

A Traditional IRA gives you the flexibility to contribute pre-tax or after-tax, but makes the requirement to begin minimum distributions at age 72. The advantage of a traditional IRA is that contributions grow tax-deferred and earnings are taxed as ordinary income upon withdrawal from the account.  Another difference from a Roth IRA is the contribution eligibility, as anyone with earned income is eligible to participate in this kind of plan.  

Most people, however, contribute to a Traditional IRA in order to get a tax deduction, and the IRS has set limits as to who may qualify.  If you are already contributing to a 401K or similar type of plan, an adjusted gross income over $68,000 will start to reduce the deduction you can take and over $78,000 you will receive no tax deduction. If both you and your spouse are contributing to a plan, then the income limit starts at $109,000 and the deduction phases out at $129,000.  If a spouse is not contributing to a plan, their IRA deduction phase out is any joint income between $204,000 and $214,000.

Simple IRA

A Simple IRA might be offered in lieu of a Traditional or Roth IRA by your employer. These IRAs are traditionally available to businesses with 100 or less employees. Employers are required to match the employee’s contribution of no more than $11,500 each year or $14,000 for those over 50. Simple IRAs are tax-deferred and tax-deductible. 

SEP IRA

Simplified Employee Pension, or SEP IRA is traditionally for those who are self-employed, like small business owners or freelancers. This type of IRA grows tax-deferred until retirement, but upon distributions is taxed as income. 

Though a SEP IRA seems like an obvious option for business owners, there is a catch. The IRS requires you to contribute equal compensation for any eligible employees in your plan, which means if you contribute 10% of your income each year you must also contribute 10% to your employee’s SEP IRA each year.  SEP IRA contributions also cannot exceed the lesser of 25% of the employee’s compensation or the max contribution amount ($61,000 in 2022)

Solo 401(k)

For business owners with no employees, a Solo 401(k) allows you to contribute more than other individual retirement plans. A Solo 401(k) allows you to contribute as both the employer and employee, which when combined has the potential to allow for further contributions than a SEP IRA. The Solo 401K also allows you to make a catch up contribution over 50, unlike the SEP IRA.  In 2022, this means you could contribute up to $61,000 to your Solo 401K, or $67,500 if over age 50. 

Navigating retirement plan options can be complex, but they are truly the core of any solid retirement plan. If you continue to ask what is the best retirement account for me, it’s time to bring in the professionals. Lean on your financial advisor  when working out the tax advantages, income eligibility, and contribution limits or begin working with one who has your investment goals in mind.