9 best retirement plans in October 2021
If you have young kids or you’re still building your career, retirement may not be top of mind at this point in your life. But someday, if you’re lucky and save on a regular basis, it will be.
To help ensure you have a financially secure retirement, it’s wise to create a plan early in life — or right now if you haven’t already done so. By diverting a portion of your paycheck into a tax-advantaged retirement savings plan, for example, your wealth can grow exponentially to help you achieve peace of mind for those so-called golden years.
Yet only about half of current employees understand the benefits offered to them, according to a 2019 survey from the Employee Benefit Research Institute.
“One company’s benefit formula may not be as generous as others,” explains David Littell, retirement planning expert and professor emeritus of taxation at The American College of Financial Services. “It’s really important that you read the summary plan description that is provided to all participants so that you can understand the design of the plan.”
By understanding your retirement plan options, you’ll be better equipped to max out your benefits and actually achieve the retirement you want.
The 9 best retirement plans
- Defined contribution plans
- IRA plans
- Solo 401(k) plan
- Traditional pensions
- Guaranteed income annuities (GIAs)
- The Federal Thrift Savings Plan
- Cash-balance plans
- Cash-value life insurance plan
- Nonqualified deferred compensation plans (NQDC)
Key plan benefits to consider
Virtually all retirement plans offer a tax advantage, whether it’s available upfront during the savings phase or when you’re taking withdrawals. For example, traditional 401(k) contributions are made with pre-tax dollars, reducing your taxable income. Roth 401(k) plans, in contrast, are funded with after-tax dollars but withdrawals are tax-free. (Here are other key differences between the two.)
Some retirement savings plans also include matching contributions from your employer, such as 401(k) or 403(b) plans, while others don’t. When trying to decide whether to invest in a 401(k) at work or an individual retirement account (IRA), go with the 401(k) if you get a company match – or do both if you can afford it.
If you were automatically enrolled in your company’s 401(k) plan, check to make sure you’re taking full advantage of the company match if one is available.
And consider increasing your annual contribution, since many plans start you off at a paltry deferral level that is not enough to ensure retirement security. Roughly half of 401(k) plans that offer automatic enrollment, according to Vanguard, use a default savings deferral rate of just 3 percent. Yet T. Rowe Price says you should “aim to save at least 15 percent of your income each year.”
If you’re self-employed, you also have several retirement savings options to choose from. In addition to the plans described below for rank-and-file workers as well as entrepreneurs, you can also invest in a Roth IRA or traditional IRA, subject to certain income limits, which have smaller annual contribution limits than most other plans. You also have a few extra options not available to everyone, including the SEP IRA, the SIMPLE IRA and the solo 401(k).
The best retirement plans to consider in October 2021:
Since their introduction in the early 1980s, defined contribution (DC) plans, which include 401(k)s, have all but taken over the retirement marketplace. Roughly 86 percent of Fortune 500 companies offered only DC plans rather than traditional pensions in 2019, according to a recent study from insurance broker Willis Towers Watson.
The 401(k) plan is the most ubiquitous DC plan among employers of all sizes, while the similarly structured 403(b) plan is offered to employees of public schools and certain tax-exempt organizations, and the 457(b) plan is most commonly available to state and local governments.
The employee’s contribution limit for each plan is $19,500 in 2021 ($26,000 for those aged 50 and over).
Many DC plans offer a Roth version, such as the Roth 401(k) in which you use after-tax dollars to contribute, but you can take the money out tax-free at retirement.
“The Roth election makes sense if you expect your tax rate to be higher at retirement than it is at the time you’re making the contribution,” says Littell.
A 401(k) plan is a tax-advantaged plan that offers a way to save for retirement. With a traditional 401(k) an employee contributes to the plan with pre-tax wages, meaning contributions are not considered taxable income. The 401(k) plan allows these contributions to grow tax-free until they’re withdrawn at retirement. At retirement, distributions create a taxable gain, though withdrawals before age 59 ½ may be subject to taxes and additional penalties.
With a Roth 401(k) an employee contributes after-tax dollars and gains are not taxed as long as they are withdrawn after age 59 1/2.
Pros: A 401(k) plan can be an easy way to save for retirement, because you can schedule the money to come out of your paycheck and be invested automatically. The money can be invested in a number of high-return investments such as stocks, and you won’t have to pay tax on the gains until you withdraw the funds (or ever in a Roth 401(k)). In addition, many employers offer you a match on contributions, giving you free money – and an automatic gain – just for saving.
Cons: One key disadvantage of 401(k) plans is that you may have to pay a penalty for accessing the money if you need it for an emergency. While many plans do allow you to take loans from your funds for qualified reasons, it’s not a guarantee that your employer’s plan will do that. Your investments are limited to the funds provided in your employer’s 401(k) program, so you may not be able to invest in what you want to.
What it means to you: A 401(k) plan is one of the best ways to save for retirement, and if you can get bonus “match” money from your employer, you can save even more quickly.
A 403(b) plan is much the same as a 401(k) plan, but it’s offered by public schools, charities and some churches, among others. The employee contributes pre-tax money to the plan, so contributions are not considered taxable income, and these funds can grow tax-free until retirement. At retirement, withdrawals are treated as ordinary income, and distributions before age 59 ½ may create additional taxes and penalties.
Similar to the Roth 401(k), a Roth 403(b) allows you to save after-tax funds and withdraw them tax-free in retirement.
Pros: A 403(b) is an effective and popular way to save for retirement, and you can schedule the money to be automatically deducted from your paycheck, helping you to save more effectively. The money can be invested in a number of investments, including annuities or high-return assets such as stock funds, and you won’t have to pay taxes until you withdraw the money. Some employers may also offer you a matching contribution if you save money in a 403(b).
Cons: Like the 401(k), the money in a 403(b) plan can be difficult to access unless you have a qualified emergency. While you may still be able to access the money without an emergency, it may cost you additional penalties and taxes, though you can also take a loan from your 403(b). Another downside: You may not be able to invest in what you want, since your options are limited to the plan’s investment choices.
What it means to you: A 403(b) plan is one of the best ways for workers in certain sectors to save for retirement, especially if they can receive any matching funds. This 403(b) calculator can help you determine how much you can save for retirement.
A 457(b) plan is similar to a 401(k), but it’s available only for employees of state and local governments and some tax-exempt organizations. In this tax-advantaged plan, an employee can contribute to the plan with pre-tax wages, meaning the income is not taxed. The 457(b) allows contributions to grow tax-free until retirement, and when the employee withdraws money, it becomes taxable.
Pros: A 457(b) plan can be an effective way to save for retirement, because of its tax advantages. The plan offers some special catch-up savings provisions for older workers that other plans don’t offer, as well. The 457(b) is considered a supplemental savings plan, and so withdrawals before age 59 ½ are not subject to the 10 percent penalty that 403(b) plans are.
Cons: The typical 457(b) plan does not offer an employer match, which makes it much less attractive than a 401(k) plan. Also, it’s even tougher to take an emergency withdrawal from a 457(b) plan than from a 401(k).
What it means to you: A 457(b) plan can be a good retirement plan, but it does offer some drawbacks compared to other defined contributions plans. And by offering withdrawals before the typical retirement age of 59 ½ without an additional penalty, the 457(b) can be beneficial for retired public servants who may have a physical disability and need access to their money.
2. IRA plans
An IRA is a valuable retirement plan created by the U.S. government to help workers save for retirement. Individuals can contribute up to $6,000 to an account in 2020 and 2021, and workers over age 50 can contribute up to $7,000.
There are many kinds of IRAs, including a traditional IRA, Roth IRA, spousal IRA, rollover IRA, SEP IRA and SIMPLE IRA. Here’s what each is and how they differ from one another.
A traditional IRA is a tax-advantaged plan that allows you significant tax breaks while you save for retirement. Anyone who earns money by working can contribute to the plan with pre-tax dollars, meaning any contributions are not taxable income. The IRA allows these contributions to grow tax-free until the account holder withdraws them at retirement and they become taxable. Earlier withdrawals may leave the employee subject to additional taxes and penalties.
Pros: A traditional IRA is a very popular account to invest for retirement, because it offers some valuable tax benefits, and it also allows you to purchase an almost-limitless number of investments – stocks, bonds, CDs, real estate and still other things. Perhaps the biggest benefit, though, is that you won’t owe any tax until you withdraw the money at retirement.
Cons: If you need your money from a traditional IRA, it can be costly to remove it because of taxes and additional penalties. And an IRA requires you to invest the money yourself, whether that’s in a bank or in stocks or bonds or something else entirely. You’ll have to decide where and how you’ll invest the money, even if that’s only to ask an adviser to invest it.
What it means to you: A traditional IRA is one of the best retirement plans around, though if you can get a 401(k) plan with a matching contribution, that’s somewhat better. But if your employer doesn’t offer a defined contribution plan, then a traditional IRA is available to you instead — though the tax deductibility of contributions is eliminated at higher income levels.
A Roth IRA is a newer take on a traditional IRA, and it offers substantial tax benefits. Contributions to a Roth IRA are made with after-tax money, meaning you’ve paid taxes on money that goes into the account. In exchange, you won’t have to pay tax on any contributions and earnings that come out of the account at retirement.
Pros: The Roth IRA offers several advantages, including the special ability to avoid taxes on all money taken out of the account in retirement, at age 59 ½ or later. The Roth IRA also provides lots of flexibility, because you can often take out contributions – not earnings – at any time without taxes or penalties. This flexibility actually makes the Roth IRA a great retirement plan.
Cons: As with a traditional IRA, you’ll have full control over the investments made in a Roth IRA. And that means you’ll need to decide how to invest the money or have someone do that job for you. There are income limits for contributing to a Roth IRA, though there’s a back-door way to get money into one.
What it means to you: A Roth IRA is an excellent choice for its huge tax advantages, and it’s an excellent choice if you’re able to grow your earnings for retirement and keep the taxman from touching it again.
IRAs are normally reserved for workers who have earned income, but the spousal IRA allows the spouse of a worker with earned income to fund an IRA as well. However, the working spouse’s taxable income must be more than the contributions made to any IRAs, and the spousal IRA can either be a traditional IRA or a Roth IRA.
Pros: The biggest positive of the spousal IRA is that it allows a non-working spouse to take advantage of an IRA’s various benefits, either the traditional or Roth version.
Cons: There’s not a particular downside to a spousal IRA, though like all IRAs, you’ll have to decide how to invest the money.
What it means to you: The spousal IRA allows you to take care of your spouse’s retirement planning without forcing your partner to have earned income as would usually be the case. That may allow your spouse to stay home or take care of other family needs.
A rollover IRA is created when you move a retirement account such as a 401(k) or IRA to a new IRA account. You “roll” the money from one account to the rollover IRA, and can still take advantage of the tax benefits of an IRA. You can establish a rollover IRA at any institution that allows you to do so, and the rollover IRA can be either a traditional IRA or a Roth IRA. There’s no limit to the amount of money that can be transferred into a rollover IRA.
A rollover IRA also allows you to convert the type of retirement account, from a traditional IRA or 401(k) to a Roth IRA. These types of transfer can create tax liabilities, however, so it’s important to understand the consequences before you decide how to proceed.
Pros: A rollover IRA allows you to continue to take advantage of attractive tax benefits, if you decide to leave a former employer’s 401(k) plan for whatever reason. If you simply want to change IRA providers for an existing IRA, you can roll over your account to a new provider. As in all IRAs, you can buy a wide variety of investments.
Cons: Like all IRAs, you’ll need to decide how to invest the money, and that may cause problems for some people. You should pay special attention to any tax consequences for rolling over your money, because they can be substantial. But this is generally only an issue if you’re converting your account type from a traditional IRA or 401(k) to a Roth IRA.
What it means to you: A rollover IRA is a convenient way to move from a 401(k) or an IRA to another IRA account. The rollover IRA may be able to improve your financial situation by offering you a chance to change IRA types from traditional to Roth or vice versa.
The SEP IRA is set up like a traditional IRA, but for small business owners and their employees. Only the employer can contribute to this plan, and contributions go into a SEP IRA for each employee rather than a trust fund. Self-employed individuals can also set up a SEP IRA.
Contribution limits in 2020 and 2021 are 25 percent of compensation or $57,000, whichever is less. Figuring out contribution limits for self-employed individuals is a bit more complicated.
“It’s very similar to a profit-sharing plan,” says Littell, because contributions can be made at the discretion of the employer.
Pros: For employees, this is a freebie retirement account. For self-employed individuals, the higher contribution limits make them much more attractive than a regular IRA.
Cons: There’s no certainty about how much employees will accumulate in this plan. Also, the money is more easily accessible. This can be viewed as more good than bad, but Littell views it as bad.
What it means to you: Account holders are still tasked with making investment decisions. Resist the temptation to break open the account early. If you tap the money before age 59 ½, you’ll likely have to pay a 10 percent penalty on top of income tax.
With 401(k) plans, employers have to pass several non-discrimination tests each year to make sure that highly compensated workers aren’t contributing too much to the plan relative to the rank-and-file.
The SIMPLE IRA bypasses those requirements because the same benefits are provided to all employees. The employer has a choice of whether to contribute a 3 percent match or make a 2 percent non-elective contribution even if the employee saves nothing in his or her own SIMPLE IRA.
Pros: Littell says most SIMPLE IRAs are designed to provide a match, so they provide an opportunity for workers to make pre-tax salary deferrals and receive a matching contribution. To the employee, this plan doesn’t look much different from a 401(k) plan.
Cons: The employee contribution is limited to $13,500 for 2020 and 2021, compared to $19,500 for other defined contribution plans. But most people don’t contribute that much anyway, says Littell.
What it means for you: As with other DC plans, employees have the same decisions to make: how much to contribute and how to invest the money. Some entrepreneurs prefer the SIMPLE IRA to the SEP IRA – here are the key differences.
Alternatively known as a Solo-k, Uni-k and One-participant k, the Solo 401(k) plan is designed for a business owner and his or her spouse.
Because the business owner is both the employer and employee, elective deferrals of up to $19,500 can be made, plus a non-elective contribution of up to 25 percent of compensation up to a total annual contribution of $57,000 for businesses, not including catch-up contributions.
Pros: “If you don’t have other employees, a solo is better than a SIMPLE IRA because you can contribute more to it,” says Littell. “The SEP is a little easier to set up and to terminate.” However, if you want to set up your plan as a Roth, you can’t do it in a SEP, but you can with a Solo-k.
Cons: It’s a bit more complicated to set up, and once assets exceed $250,000, you’ll have to file an annual report on Form 5500-SE.
What it means to you: If you have plans to expand and hire employees, this plan won’t work. Once you hire other workers, the IRS mandates that they must be included in the plan if they meet eligibility requirements, and the plan will be subject to non-discrimination testing. The solo 401(k) compares favorably to the popular SEP IRA, too.
Traditional pensions are a type of defined benefit (DB) plan, and they are one of the easiest to manage because so little is required of you as an employee.
Pensions are fully funded by employers and provide a fixed monthly benefit to workers at retirement. But DB plans are on the endangered species list because fewer companies are offering them. Just 14 percent of Fortune 500 companies enticed new workers with pension plans in 2019, down from 59 percent in 1998, according to data from Willis Towers Watson.
Why? DB plans require the employer to make good on an expensive promise to fund a hefty sum for your retirement. Pensions, which are payable for life, usually replace a percentage of your pay based on your tenure and salary.
A common formula is 1.5 percent of final average compensation multiplied by years of service, according to Littell. A worker with an average pay of $50,000 over a 25-year career, for example, would receive an annual pension payout of $18,750, or $1,562.50 a month.
Pros: This benefit addresses longevity risk – or the risk of running out of money before you die.
“If you understand that your company is providing a replacement of 30 percent to 40 percent of your pay for the rest of your life, plus you’re getting 40 percent from Social Security, this provides a strong baseline of financial security,” says Littell. “Additional savings can help but are not as central to your retirement security.”
Cons: Since the formula is generally tied to years of service and compensation, the benefit grows more rapidly at the end of your career. “If you were to change jobs or if the company were to terminate the plan before you hit retirement age, you can get a lot less than the benefit you originally expected,” says Littell.
What it means to you: Since company pensions are increasingly rare and valuable, if you are fortunate enough to have one, leaving the company can be a major decision. Should you stay or should you go? It depends on the financial strength of your employer, how long you’ve been with the company and how close you are to retiring. You can also factor in your job satisfaction and whether there are better employment opportunities elsewhere.
GIAs are generally not offered by employers, but individuals can buy these annuities to create their own pensions. You can trade a big lump sum at retirement and buy an immediate annuity to get a monthly payment for life, but most people aren’t comfortable with this arrangement. More popular are deferred income annuities that are paid into over time.
For example, at age 50, you can begin making premium payments until age 65, if that’s when you plan to retire. “Each time you make a payment, it bumps up your payment for life,” says Littell.
You can buy these on an after-tax basis, in which case you’ll owe tax only on the plan’s earnings. Or you can buy it within an IRA and can get an upfront tax deduction, but the entire annuity would be taxable when you take withdrawals.
Pros: Littell himself invested in a deferred income annuity to create an income stream for life. “It’s very satisfying, it felt really good building a bigger pension over time,” he says.
Cons: If you’re not sure when you’re going to retire or even if you’re going to retire, then it may not make sense. “You’re also locking into a strategy that you can’t get rid of,” he says.
In addition, annuities are complex legal contracts, and it can be difficult to understand your rights and rewards for signing up for an annuity. You’ll want to be fully informed about what the annuity will and won’t do for you.
What it means to you: You’ll be getting bond-like returns and you lose the possibility of getting higher returns in the stock market in exchange for the guaranteed income. Since payments are for life, you also get more payments (and a better overall return) if you live longer.
“People forget that these decisions always involve a trade-off,” Littell says.
The Thrift Savings Plan (TSP) is a lot like a 401(k) plan on steroids, and it’s available to government workers and members of the uniformed services.
Participants choose from five low-cost investment options, including a bond fund, an S&P 500 index fund, a small-cap fund and an international stock fund — plus a fund that invests in specially issued Treasury securities.
On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.
Pros: Federal employees can get a 5 percent employer contribution to the TSP, which includes a 1 percent non-elective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed.
“The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent,” says Littell. “Another positive is that the investment fees are shockingly low – four hundredths of a percentage point.” That translates to 40 cents annually per $1,000 invested – much lower than you’ll find elsewhere.
Cons: As with all defined contribution plans, there’s always uncertainty about what your account balance might be when you retire.
What it means to you: You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it makes a lot of sense to contribute at least 5 percent of your salary to get the maximum employer contribution.
Cash-balance plans are a type of defined benefit, or pension plan, too.
But instead of replacing a certain percentage of your income for life, you are promised a certain hypothetical account balance based on contribution credits and investment credits (e.g., annual interest). One common setup for cash-balance plans is a company contribution credit of 6 percent of pay plus a 5 percent annual investment credit, says Littell.
The investment credits are a promise and are not based on actual contribution credits. For example, let’s say a 5 percent return, or investment credit, is promised. If the plan assets earn more, the employer can decrease contributions. In fact, many companies that want to shed their traditional pension plan convert to a cash-balance plan because it allows them better control over the costs of the plan.
Pros: It still provides a promised benefit, and you don’t have to contribute anything to it. “There’s a fair amount of certainty in how much you’re going to get,” says Littell. Also, if you do decide to switch jobs, your account balance is portable so you’ll get whatever the account is worth on your way out the door of your old job.
Cons: If the company changes from a generous pension plan to a cash-balance plan, older workers can potentially lose out, though some companies will grandfather long-term employees into the original plan. Also, the investment credits are relatively modest, typically 4 percent or 5 percent. “It becomes a conservative part of your portfolio,” says Littell.
What it means to you: The date you retire will impact your benefit, and working longer is more advantageous. “Retiring early can truncate your benefit,” says Littell.
Also, you’ll get to choose from a lump sum or an annuity form of benefit. When given the option between a $200,000 lump sum or a monthly annuity check of $1,000 for life, “too many people,” choose the lump sum when they’d be better off getting the annuity for life, says Littell.
Some companies offer insurance vehicles as a benefit.
There are various types: whole life, variable life, universal life and variable universal life. They provide a death benefit while at the same time building cash value, which could support your retirement needs. If you withdraw the cash value, the premiums you paid – your cost basis – come out first and are not subject to tax.
“There are some similarities to the Roth tax treatment, but more complicated,” says Littell. “You don’t get a deduction on the way in, but if properly designed you can get tax-free withdrawals on the way out.”
Pros: It addresses multiple risks by providing either a death benefit or a source of income. Plus, you get tax deferral on the growth of your investment.
Cons: “If you don’t do it right, if the policy lapses, you end up with a big tax bill,” says Littell. Like other insurance solutions, once you buy it, you are more or less locked into the strategy for the long term. Another risk is that the products don’t always perform as well as the illustrations might show that they will.
What it means to you: These products are for wealthier people who have already maxed out all other retirement savings vehicles. If you’ve reached the contribution limits for your 401(k) and your IRA, then you might consider investing in this type of life insurance.
Unless you’re a top executive in the C-suite, you can pretty much forget about being offered an NQDC plan. There are two main types: One looks like a 401(k) plan with salary deferrals and a company match, and the other is solely funded by the employer.
The catch is that most often the latter one is not really funded. The employer puts in writing a “mere promise to pay” and may make bookkeeping entries and set aside funds, but those funds are subject to claims by creditors.
Pros: The benefit is you can save money on a tax-deferred basis, but the employer can’t take a tax deduction for its contribution until you start paying income tax on withdrawals.
Cons: They don’t offer as much security, because the future promise to pay relies on the solvency of the company.
“There’s some risk that you won’t get your payments (from an NQDC plan) if the company has financial problems,” says Littell.
What it means to you: For executives with access to an NQDC plan in addition to a 401(k) plan, Littell’s advice is to max out the 401(k) contributions first. Then if the company is financially secure, contribute to the NQDC plan if it’s set up like a 401(k) with a match.
Which retirement plan is best for you?
In many cases you simply won’t have a choice of retirement plans. You’ll have to take what your employer offers, whether that’s a 401(k), a 403(b), a defined-benefit plan or something else. But you can supplement that with an IRA, which is available to anyone regardless of their employer.
Here’s a comparison of the pros and cons of a few retirement plans.
Employer-offered retirement plans
Defined-contribution plans such as the 401(k) and 403(b) offer several benefits over a defined-benefit plan such as a pension plan:
- Portability: You can take your 401(k) or 403(b) to another employer when you change jobs or even roll it into an IRA at that point. A pension plan may stick with your employer, so if you leave the company, you may not have a plan.
- Potential for higher returns: A 401(k) or 403(b) may offer the potential for much higher returns because it can be invested in higher-return assets such as stocks.
- Freedom: Because of its portability, a defined-contribution plan gives you the ability to leave an employer without fear of losing retirement benefits.
- Not reliant on your employer’s success: Receiving an adequate pension may depend a lot on the continued existence of your employer. In contrast, a defined-contribution plan does not have this risk because of its portability.
While those advantages are important, defined-benefit plans offer some pros, too:
- Income that shouldn’t run out: One of the biggest benefits of a pension plan is that it typically pays until your death, meaning you will not outlive your income, a real risk with 401(k), 403(b) and other such plans.
- You don’t need to manage them: Pensions don’t require much of you. You don’t have to worry about investing your money or what kind of return it’s making or whether you’re properly invested. Your employer takes care of all of that.
So those are important considerations between defined-contribution plans and defined-benefit plans. More often than not, you won’t have a choice between the two at any individual employer.
Retirement plans for self-employed or small business owners
If you’re self-employed or own a small business, you have some further options for creating your own retirement plan. Three of the most popular options are a solo 401(k), a SIMPLE IRA and a SEP IRA, and these offer a number of benefits to participants:
- Higher contribution limits: Plans such as the solo 401(k) and SEP IRA give participants much higher contribution limits than a typical 401(k) plan.
- The ability to profit share: These plans may allow you to contribute to the employee limit and then add in an extra helping of profits as an employer contribution.
- Less regulation: These retirement plans typically reduce the amount of regulation required versus a standard plan, meaning it’s easier to administer them.
- Investible in higher-return assets: These plans can be invested in higher-return assets such as stocks or stock funds.
- Varied investment options: Unlike a typical company administered retirement plan, these plans may allow you to invest in a wider array of assets.
So those are some of the key benefits of retirement plans for the self-employed or small business owners.
How to get started
With some of these retirement plans (such as defined benefit and defined contribution plans), you’ll have access to the plan through your employer. So if your employer doesn’t offer them, you really don’t have that option at all. But if you’re self-employed (or even just running a side gig) or earn any income, then you have options to set up a retirement plan for yourself.
First, you’ll need to determine what kind of account you’ll need. If you’re not running a business, then your option is an IRA, but you’ll need to decide between a traditional and a Roth IRA.
If you do have a business – even a one-person shop – then you have a few more options, and you’ll need to come up with the best alternative for your situation.
Then you can contact a financial institution to determine if they offer the kind of plan you’re looking for. In the case of IRAs, almost all large financial institutions offer some form of IRA, and you can quickly set up an account at one of the major online brokerages.
In the case of self-employed plans, you may have to look a little more, since not all brokers have every type of plan, but high-quality brokers offer them and often charge no fee to establish one.
What is the best investment strategy for retirement?
Many workers have both a 401(k) plan and an IRA at their disposal, so that gives them two tax-advantaged ways to save for retirement, and they should make the most of them. But it can make sense to use your account options strategically to really max out your benefits.
One of your biggest advantages is actually an employer who matches your retirement contributions up to some amount. The most important goal of saving in a 401(k) is to try and max out this employer match. It’s easy money that provides you an immediate return for saving.
For example, this employer “match” will often give you 50 to 100 percent of your contribution each year, up to some maximum, perhaps 3 to 5 percent of your salary.
To optimize your retirement accounts, experts recommend investing in both a 401(k) and an IRA in the following order:
- Max out your 401(k) match: The 401(k) is your top choice if your employer offers any kind of match. Once you receive this maximum free money, consider investing in an IRA.
- Max out your IRA: Turn to the IRA if you’ve maxed out your 401(k) match or if your employer doesn’t offer a 401(k) plan or a match. Experts favor the Roth IRA because of all its perks.
- Then max out your 401(k): If you’ve maxed out your IRA and you can save more, you can turn back to your 401(k) and add more up until the maximum annual contribution.
In any case, the best strategy to secure your financial future is to top out your accounts, saving the maximum legal amounts each year. The earlier you start investing for your future, the more your money will be able to compound, and these tax-advantaged can help you amass money even more quickly because you won’t have the extra drag from taxes.