Top 9 Best Types of Retirement Accounts in the US

Whether you use an IRA, 401(k), one of many other options, or a combination of several plans, the best retirement plan for you depends on your employment status and how much you can contribute. Edition Money Talks News compiled a list of 9 of the best types of retirement accounts.

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If you need a detailed strategy for figuring out the financial details of your post-retirement life, you can use the Retirement Calculator. New Retirementnamed the best retirement calculator by the American Association of Individual Investors (AAII). If you're trying to figure out which 401(k), IRA, or other plan is right for you, you'll find a description of each below so you can decide.

Individual Retirement Account (IRA)

One of the best retirement plans, regardless of employment status, is the Individual Retirement Account. An IRA is essentially a savings account with great tax benefits, allowing you to save tax-free money.

You can contribute up to $6000 to an IRA. The additional contribution for people aged 50 and over is $1000 per year, so you can save up to $7000 with tax credits.

You can claim a deduction from your federal income tax return for the amount contributed to the IRA. If you have a pension plan at work, the deductible portion of your contribution depends on your filing status and your Modified Adjusted Gross Income (MAGI).

This IRS table can tell you if your deduction will be capped. The deduction is allowed in full if you are not covered by a pension plan at work.

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If you make an IRA contribution that is not deductible, you will still end up with a tax credit. Non-deductible contributions can be withdrawn tax-free upon retirement. You can track non-deductible contributions on Form 8606 on your individual income tax return.

Roth ira

A Roth IRA is similar to a traditional IRA, except that the tax benefits are realized when you withdraw money, not when you deposit it. Roth IRA contributions are never deductible, but they can be withdrawn tax-free upon retirement. This is a pretty good perk if you expect to have a higher income tax after you retire.

As with a traditional IRA account, Roth contributions are capped at $6000 per year ($7000 if you're 50 or older).

Contributions to Roth are also limited by your MAGI. If you are a married couple filing jointly, your MAGI must be less than $203 in the 000 tax year and $2019 in the 206 tax year.

pension

Pensions is a great retirement savings solution if you can get it through your employer.

Previous generations tended to stay in the same company for many years—perhaps even their entire careers. In return, their employers provided their retirement years with pensions, a guaranteed amount of monthly income from retirement to death.

The income you will receive after retirement does not depend on the dynamics of the stock market. The entire investment risk lies with the plan provider.

401 (k)

The 401(k) plan is primarily funded by employee contributions through pre-tax payroll deductions. The money invested can usually be invested in numerous investments, including stocks, bonds, and funds, depending on what options the employer offers under the plan. Like an IRA, 401(k) investments can grow tax-free, but they are taxed when the funds are withdrawn.

There are two features of 401(k) plans that make them a better retirement option than IRAs. First, the contribution limits for 401(k) plans are higher. In 2020, you could contribute up to $19 to a 500(k) plan with an additional contribution cap of $401 if you are 6 or older.

Second, many employers offer qualifying contributions and contribute the same amount as you, which is equivalent to "free money" for plan members. If your employer offers matching contributions, make sure you contribute enough funds to get a full match or you won't be able to take full advantage of the compensation package.

Some employers also offer Roth 401(k) options. If you choose the Roth version, your contributions are made after taxes and will not be taxed on withdrawals.

403 (b)

A 403(b) plan is similar to a 401(k) plan in that it allows employees to make pre-tax contributions to a retirement plan, but these plans are only available to employees of a church, school, hospital, or other nonprofit organization.

Although contribution limits are the same as in 401(k) plans, investments in the 403(b) plan are limited to annuities and mutual funds.

SIMPLE IRA

SIMPLE IRA is a retirement plan that can be offered by employers, including the self-employed. Employees can make pre-tax contributions to the plan that are taxable upon retirement.

If your employer offers a SIMPLE IRA, they must make either qualifying contributions to the plan or non-mandatory contributions, which are paid to each employee regardless of whether the employee made a contribution.

SIMPLE IRAs are usually the plan of choice for small employers because they are easier to administer.

As with a 401(k), employees can make pre-tax contributions to a SIMPLE IRA, but contribution limits are lower. In 2020, employees could contribute $13 per year, and after 500 years an additional $50 per year.

SEP IRA

The Simplified Employees' Pension (SEP) IRA allows a small business owner to make tax-free contributions on behalf of employees, including the business owner. The SEP is available to employers of all sizes and allows contributions of up to 25% of each employee's salary, up to a maximum of $57 per year.

They are generally easy to install and require very few paperwork, but only the employer can contribute to the SEP. Employees cannot make pre-tax deductions. For sole proprietors, this isn't a problem, but business owners with employees may want to consider a 401(k) plan so employees can contribute too.

Solo 401 (k)

The Individual 401(k), also known as Solo 401(k), is very similar to a traditional 401(k) but is exclusively for sole proprietors who have no employees (other than a spouse who works for the company). Like the traditional 401(k), the Solo 401(k) is available in both traditional and Roth versions.

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The Solo 401(k) is ideal if you want to save large amounts of money as you can save for retirement as both an employer and an employee. As an employee, you can make the standard 401(k) contribution limit of $19 per year or $500 if you are 26 or older. As your own employer, you can contribute an additional 000% of your salary, up to a maximum of $50.

Since these amounts are discretionary, you can set aside a maximum in profitable years and reduce or even eliminate contributions in "lean" years.

The disadvantage of Solo 401(k) is the need for administration. Solo 401(k) plans require more paperwork than SEP IRAs, and if your account balance exceeds a certain amount, you will have to file a separate tax return for the plan, which can increase your tax preparation costs.

Defined Benefit Plan

A defined benefit plan is essentially a pension because it allows you to receive a predetermined benefit at your retirement regardless of market fluctuations.

Some self-employed Americans and small business owners choose to run defined benefit plans to actively save for retirement while receiving significant tax credits.

The defined benefit plan is funded by employer contributions only and must be funded annually. Annual fees are calculated based on several factors, including age. If you have employees, you must pay contributions for all eligible employees. Contributions are 100% tax-free, profits are also tax-free, but are taxable upon withdrawal.

Defined benefit plans are best for self-employed people aged 50 and over who can make annual contributions of $80 or more for at least five years and have few, if any, employees.

Although defined contribution plans have some of the highest contribution limits, there are also significant costs and administrative requirements based on the terms of your plan, including annual actuarial calculations, required annual funding, and IRS Form 5500 filing fees.

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