What's in This Comparison?
The U.S. retirement system is disjointed – and complicated. There are many different financial accounts and many different financial products. In fact, there are over 200 different individual retirement accounts alone.
This can be overwhelming, so we’ve ranked and reviewed all of the major retirement plans available and made them easy to compare. We’ll show you which ones come out on top as the best retirement accounts and why. All of the rankings and reviews are based on unbiased research using the most accurate data available.
Once you know which account is best for you, you can get started! Each of the individual profiles has the steps to open the account and a summary of the best features.
Employer-Sponsored Plans
Your employer may offer you the opportunity to save for retirement using some form of tax sheltered retirement savings plan. These are often referred to as “401(k)” plans after the section of the tax code that specifically covers them. Some employers will also offer two other types of plan – a traditional pension plan and a profit sharing plan.
Traditional 401(k) plan … A 401(k) is the most common of all employer-sponsored plans. It is nearly identical to the IRAs and to the Roth IRAs with the additional advantage of employer matching for your contributions. Employer matching means that the employer will make contributions of money to your account if you choose to open one.
There are two basic types of 401(k) plans. The traditional 401(k) is also referred to as a defined-contribution plan because there is a fixed amount of money that is contributed on your behalf by your employer. Your contribution amount, as well as your employer’s contribution amount, is defined by the plan document.
The other type is called a 401(k) profit sharing plan. Again, this is a defined-contribution plan but there are additional flexibility features in the plan document. The flexibility gives the employer the opportunity to allocate a percentage of profits among the participants of the plan.
Traditional 401(k) Plans
The 401(k) plan, which stands for 401(k) assets, is an employer-sponsored retirement savings plan that is available primarily to individuals who work in the private sector (although there are government 401(k) plans, as well). Although both a traditional and a Roth 401(k) plan allow you to invest money tax-free, a traditional 401(k) plan allows your employer to put in money on your behalf. Most employers match a certain percentage of your contributions, up to a certain maximum that is set by the employer. (The only money that is counted is the money that you contribute. There is no match on the employer side for any amount you withdraw.) There are a few services (for example, Mint) that will automatically manage your 401(k) plan for you and give you investment advice. Enrollment in a 401(k) plan is also automatic unless you specifically exclude yourself. Say, for example, that you don’t want to have money that you could use now invested in stocks, which could make you a bit nervous but for which you might be rewarded in the long run. Your only option would be to ask the 401(k) manager to allow you to opt out. Otherwise, you will be enrolled in the plan.
Solo 401(k) Plans
Other self-employed retirement plans are Solo 401(k) plans. While it is called a solo 401(k), that doesn’t mean that you must be self-employed by yourself. If you have a partner, you can both sign onto a solo 401(k) plan for your business and enjoy numerous tax savings.
Compared to standard 401(k) plans, Solo 401(k) plans have lower contribution limits and no employer profit sharing option. However, the Solo 401(k) plan does offer some advantages over the other retirement plans for self-employed people. Contributions to a Solo 401(k) plan are made on a pre-tax basis. This lowers your taxable income. You can also choose to make contributions in the form of a loan. This can help you avoid taxes in the present, even if you don’t need the money right now. You can choose to repay the loan before retirement, so you can accumulate certain assets.
401(k) or 403(b)
Which Is Right For You?
Today, more than ever, employees are looking at their 401(k) and 403(b) plans and deciding whether or not to participate … and if so, how best to utilize their account. If you’re still not sure which retirement plan is best for you, here’s a comparison of these types of plans.
Workers who earn income from a qualifying employer can set up an individual retirement account (IRA) and deduct their contributions on their taxes each year. Since personal retirement plans are set up by the employer, these plans are also known as 'defined contribution' plans.
Similar to the IRA plans, employers set up 401(k) and 403(b) plans for their employees. The employer has the option to match the employee contribution, but they are not required to do so. These plans provide tax deductions for the contribution amount and make it easier for many people to save for their own retirement.
In this article, we will discuss the main differences between 401(k) and 403(b) plans, so you can decide which account is best for you.
Pension Plans
Who Qualifies for Which Plan?
Of the various types of plans, pension plans are probably the most traditional. They are typically offered by employers to their employees. In the past, most workers expected to have a pension plan that would pay them an income when they retired. But lately, the number of workers covered by such a plan has been falling. Workers are now more likely to have a 401k or 403b plan, which is typically an investment account that their employer will match some contributions.
Not all workers receive pension benefits from their employer. Many people receive social security as their primary pension plan.
Some self-employed workers (that includes people with a small business) also open a SEP IRA. This is a special retirement account that allows them to pay themselves a pension when they retire and there is also extra money in the account.
In addition to these traditional pension plans, there are several other types of plans:
- Defined Benefit Plan
- Cash Balance Plan
- Simplified Employee Pension Plan
Almost all pension plans are funded by employer contributions at the time the employee is hired. But, many (especially larger companies) also contribute money to the employee’s pension account.
SEP IRA Plans
A SEP IRA allows you to save money penalty-free and tax-free. That’s because the government doesn’t consider SEP IRAs to be regular income tax accounts, but rather retirement accounts.
SEP IRAs are particularly good for beginners and for those who don’t have a lot to save at first. That’s because there are no income limits for contribution.
You can contribute a percentage of your income up to a certain limit, but you’ll never have to worry about contributing every year. In fact, some employers use SEP IRAs as a way to allow their employees to save without making contributions every year.
SEP IRA plans are also set up differently than traditional IRA’s. A traditional IRA is funded with the current year’s income. SEP IRAs are funded using employer contributions and, if you choose to use them, personal contributions.
That makes the SEP IRA much easier to use for employers who find it difficult to budget for one-off IRA contributions and for individuals who wish to increase their contributions along the way.
Tax-Advantage Individual Retirement Accounts
(IRAs)
You're no doubt familiar with the benefits of a retirement account “ one of the best ways to save for retirement and a hedge against running out of money when you can't work anymore.
But even among the various types of retirement accounts, there is a lot of confusion about where your money belongs.
Should you stash your cash in a 401(k) plan? Or choose a traditional or Roth IRA? A SEP-IRA? SIMPLE IRA? Or something else? And how do matching contributions figure into your decision?
Special Individual Retirement Accounts
There are many types of individual retirement accounts. Although the IRS classifies them as either an IRA or a Roth IRA, each type comes with its own set of rules, contribution limits and potential tax benefits. The four major types of IRAs are:
- Traditional IRAs,
- Roth IRAs,
- SEP IRAs,
- SIMPLE IRAs
Traditional IRAs and Roth IRAs are the most common types of IRAs. Both are individual accounts that let you save a portion of your income tax-deferred, and both are funded through regular contributions that lower your taxable income for the year.
Qualified withdrawals from a Roth IRA are tax-free, but to take full advantage of this tax-free feature, your income must be below a certain level.
Traditional IRA
So, you have decided to retire, and you have a few options for saving for your golden years. Which retirement account is best? The answer depends on your income and how much you are looking to invest. Which retirement plan is right for you?
The first thing to know about traditional IRA, SIMPLE IRA and SEP IRA is that they fall under the category of retirement accounts, known as defined contribution plans. These accounts operate like a 401(k). Your contributions to the accounts are taken from your earnings before income tax is assessed. SIMPLE IRA and SEP IRAs can allow your invested account to grow (and therefore cover more retirement costs) tax-free, while your contributions to a traditional IRA are tax-deductible. Let’s compare each to help you determine which is the best retirement account for you.
Traditional IRA
Once you reach age 70 and a half, you must take required minimum distributions from any traditional IRA that you own. This is one of the biggest advantages of this type of IRA.
If you have only chosen to make yearly contributions to a Traditional IRA there are no limits on the amount that you can contribute. The same is true for a SIMPLE IRA.
Roth IRA
One of the most commonly asked questions by beginning investors is whether they should invest in a Roth IRA or a traditional IRA.
To understand why this is a common question, you first need to understand a little about how these two different investment accounts work.
What is a Traditional IRA?
When you invest in a traditional IRA, you are investing in a retirement account that is tax deductible. The advantage of this is that you can shelter your income from taxes until you retire.
When you are taxed upon withdrawing money from a traditional IRA, you are only taxed based on your current income, and not on the principal amount that you invested.
At that time, you are taxed at your ordinary income rate, which is likely to be much lower than what you would have been taxed at if you had not invested in an IRA.
What is a Roth IRA?
With the Roth IRA investment account, you have to pay taxes on the money that you put in.
However, when you withdraw the money from the account, you do not have to pay taxes on the amount that you withdraw.
So which is the better choice and why?
In order to answer that question, you need to know a little bit about how each works.
Let's start with a traditional IRA. With this account, the money that you put in each year is the money that you get out of the account.
SIMPLE IRA
The simple IRA plan falls under the employment-sponsored retirement plan category. The employer can decide if they want to extend the plan to all employees or if they want to have a group of select employees that they choose to offer this.
Employees will not be required to contribute any money to the plan. They will have to pay taxes on any amount that they are not contributing to the simple IRA. On the other hand, employers that are offering the plan to their employees have to make sure it follows Internal Revenue Service (IRS) rules.
Employees can start funding the simple IRA plan at any time, but they have to make sure the money does not exceed the limits that the IRS has in place. Another rule that the IRS has in place is employers can allow employees to make pre-tax or after-tax contributions. So the final amount of the contribution will depend on the decision that the employer has made.
Simple IRA plans allow employers to make a profit sharing contribution for the years that they maintain a SIMPLE IRA Plan. This will occur each year and the amount of money the employer contributes is refundable. It is based on the profits that the employer makes.
If the employer allows employees to start contributing money to the plan at any time during the year, they have to make sure they complete a form called Form 5304-SIMPLE by April 15 for the previous year. However, there are employers that do not have to do this.
Alternative Retirement Policies
| Which Retirement Plan Is Best?
There are several ways that an individual can put provisions in place to make sure they are taken care of after they have retired. One of these ways is setting up a retirement fund to provide income after the contributor passes away. These funds can be set up through the IRS described plans that qualify and are referred to as the typical retirement accounts, including the individual retirement account ( IRA ), the employer-sponsored account such as a 401k or 403b or a self-employed 401k.
Individual retirement accounts are another way that an individual can set provisions for themselves to be taken care of after they have retired from working. The typical IRAs are funded by the individual using after-tax income and the withdrawals from the account are not taxable. There are other types of IRAs that can be funded with after-tax and pre-tax income such as a Roth IRA.
Self-Employed 401ks and 401k plan accounts, also referred to as the qualified employer-sponsored retirement plans, are another way that an individual can establish provisions in place for themselves to be taken care of after they have retired from working. The employer contributions, along with the employee contributions, are made on a pretax basis, and the withdrawals are treated as taxable income. Withdrawals from company sponsored IRAs can also be made on an after-tax basis.
Permanent Life Insurance
If you have a steady income and a healthy lifestyle, permanent life insurance could be a good investment for you. Your policy will accumulate cash value and, based on premiums and the size of your policy, you may eventually earn a sizable death benefit. Cash values can remain tax-deferred until the policy is annuitized or paid out. If you choose to annuitize your plan, rates are often figured by an Internal Rate of Return calculation. IRR is a common method of estimating the rate of return on an investment.
You have the option of taking immediate payments, receiving deferred payments, or a combination of both. With immediate payouts, you can take a lump sum of cash. With deferred option, you may be able to opt for monthly, quarterly, seasonal, or annual payouts.
Annuities
An annuity is an insurance product that draws a set annuity payment every year at the end of the year, typically for life but sometimes for a finite period. It is a large sum of money one would generally receive upon age 65 but can also be received by another person under certain conditions. Be it cash or a guaranteed income, one's future is secured with this type of investment. Although withdrawals are allowed, strict rules can apply.
Are Withdrawals from Annuities allowed?
An annuity is a binding contract between two parties, and both parties must agree to any withdrawal. If the insurance company goes bankrupt, then the guarantee to pay the annuity can be changed. It is a good idea to access the guarantee anytime there is a significant change in one's situation such as a divorce, the death of a beneficiary, or a change in health status.
These events can influence the payouts of annuities, just like they can influence withdrawals of IRA or 401k annuities. Therefore, it is best to ask the insurance company for confirmation before any withdrawal is made.
How to Open a Retirement Account
Depending on your income and pertinent details, you may be able to begin contributing retirement funds to an account through your employer. This may be referred to as a 401(k) account, a 403(b) account or a 457 plan if you are employed by a nonprofit organization. Once you have an employer-sponsored account, you can also open an IRA account, although you will no longer be able to contribute to an employer-sponsored account.
Your employer should be able to provide you with instructions on how to open an IRA once you have saved enough money to contribute, as well as a list of companies through which you can open an account. Many people choose to open an IRA on one of their regular banking accounts, such as a checking account, which makes it easy to transfer funds to the account when it becomes necessary. This can be a good strategy, particularly when you are just starting to open a retirement account.
Strongly Consider an IRA Account
IRA’s and 401k’s are two of the most popular retirement accounts. Unfortunately, there has been a lot of confusion on what the difference is between the two and what the benefits of both are. While these accounts do have a lot of differences, they do have some similarities, which is what makes this topic so confusing.
Here are a few key differences between the two accounts:
IRA’s 401(k)’s
Have contribution limits. Have contribution limits.
Can be withdrawn from at any time – without penalty. You must wait until you reach the age of 59 1/2 to withdraw any funds.
Can invest in almost anything – bonds, CDs, stocks, mutual funds, money market accounts, etc. You must invest in approved funds.
Earn income tax credits. Earn income tax credits.
No employer match, but employers often help with the tax-deductible portion of your contributions. Employer match.
Can be rolled over to other accounts. Cannot be rolled over to other accounts.
Working with multiple sources of retirement funds just makes your life easier. You have IRA options that are more flexible and HMDA, which works out well for middle income families. Taking the extra step to open an IRA account can definitely prove to be worth it in the long run.
The Bottom Line
In the IRS Publication 590, it explains the difference between traditional and Roth accounts. It states that if you expect your tax-bracket to be lower in retirement, a traditional IRA is ideal. If you expect your tax bracket to be higher in retirement, the Roth is the preferred option post-retirement.