How to find the best retirement plans to save for your future can be overwhelming. Here’s everything you need to know about the best types of retirement plans available and how to decide which one is best for you.
When it comes to planning for retirement, many Americans are falling behind on their savings. The coronavirus pandemic and an unsettled economy have caused a lot of shifts in the past few years. Before the crisis, American households saw retirement accounts grow by an average of 5% between 2016 and 2019, according to the Federal Reserve Survey of Consumer Finances. However, the average 401(k) and individual retirement account (IRA) balances are both down 2% from a year ago, according to the latest data from Fidelity.
To actually be able to retire, you’ll have to make sure you are putting enough away. There are different ways you can save, depending on your situation. An employer-sponsored plan, such as a 401(k) plan, or an individual retirement account — whether traditional or Roth — are the most popular options. But there are more to consider. Each plan has different rules, although each offers some form of tax advantage. By understanding your retirement plan options, you’ll be better equipped to max out your benefits and actually achieve the retirement you want.
5 types of employer-sponsored retirement plans
Not everyone has access to an employer-sponsored retirement plan. Even if you do have a retirement plan through work, like a 401(k), you may want to save additional money beyond the annual 401(k) contribution limits. If that’s the case, some of the best retirement plans for saving on your own are Individual Retirement Accounts (IRAs) and annuities.
| Plan Type | Pros | Cons | Considerations |
|---|---|---|---|
| 401(k)/Roth 401(k) | Employer might match contributions. If employer offers traditional and Roth 401(k)s, participants can fund both; the total annual limit is $19,500 (or $26,000 for those age 50 and older) in 2021 and $20,500 ($27,000 for age 50 and older) | Investment choices might be limitedPlan fees can be high | Roth 401(k) requires you start taking minimum distributions at age 72, unlike a Roth IRA (Roth IRAs have no required distributions) |
| 403(b) (aka TSA or Tax-Sheltered Annuity) | Has higher limits for matches than 401(k)Optional 15-year rule allows catchup contributions up to a $15,000 lifetime max | Investments sometimes limited to high-fee mutual funds and/or variable annuity multiyear contracts | Employees with 15 years of service might qualify for $3,000 in catchup contributions each year for 5 years |
| 457(b) | If employer offers a 403(b)or 401(k) in addition to the 457, workers might be eligible to contribute to bothNo early withdrawal penalty if you leave jobContractors are eligible | No qualified early withdrawals allowed | Participants might qualify for the Retirement Saver’s Credit |
| Defined Benefit Plan | Predictable retirement benefit. Employers get higher deduction for offering this plan | Complex and costly to establish | Participants have less control over contribution amounts and investments |
| TSP (Thrift Savings Plan) | Employees receive matching funds even if they don’t contributeOffers low-cost investment options | Three-year vesting schedule for some agency contributions and earningsLimited investment options | Federal employees also have a defined benefit plan |
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.
You can contribute to a traditional or Roth IRA even if you participate in another retirement plan through your employer or business. However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.
5 retirement plans for the self-employed and small-business owners
Self-employed retirement plans give people the opportunity to amass wealth while potentially reducing their current tax liabilities.
According to Bureau of Labor Statistics (BLS) data, more than 10 million Americans have described themselves as self-employed in 2022, the highest number in 13 years. If you are one of the ten million considering self-employment, you should understand that it also means figuring out how to save for retirement on your own (or with the help of a financial advisor).
| SEP IRA | Solo 401(k)/Solo Roth 401(k) | SIMPLE IRA | Payroll deduction IRA | Profit Sharing | |
|---|---|---|---|---|---|
| Best for | Self-employed people; employers with one or more employees | Self-employed people with no employees other than a spouse | Self-employed people; businesses with up to 100 employees | Self-employed people; employers with one or more employees | Self-employed people; employers with one or more employees |
| Funded by | Employer; individual, if self-employed | Self or qualified spouse | Employee deferrals; employer contributions | Employee, via payroll deduction | Employers, at their discretion; might be linked with employer’s workplace retirement plan |
| 2021 employee contribution limits | Contributions for employees made solely by employer (or sole proprietor); limit of 25% of net self-employment income, to a maximum of $58,000 | Lesser of $19,500 ($26,000 for those age 50 and older) and 100% of earned income | $13,500; $16,500 for those age 50 or older | Based on employee’s IRA eligibility; maximum of $6,000; $7,000 for those age 50 and older | N/A |
| 2021 employer contribution limits | The lesser of up to 25% of compensation or $58,000 | As both an employee (of yourself) and employer, up to $58,000, or $64,500 with catch-up contribution | Mandatory matching contribution of up to 3% of an employee’s compensation or fixed contribution of 2% | N/A | The lesser of up to 25% of employee compensation or $58,000 ($64,500 including catch-up contributions) |
| Taxes on contributions and earnings | Contributions and investment income are tax-deferred; earnings grow tax-deferred | Contributions and investment income in a traditional Solo 401(k) are tax-deferred; contributions to a Solo Roth 401(k) are taxable; earnings grow tax-free | Contributions and investment income are tax-deferred; earnings grow tax-deferred | Contributions to a traditional IRA might be deductible; contributions to a Roth are taxable; earnings grow tax-deferred | No taxes on contributions; earnings grow tax-deferred |
| Taxes on withdrawals after age 59 1/2 | Taxed at ordinary rates | Traditional Solo 401(k) withdrawals are taxed at ordinary rates; Solo Roth(401)k withdrawals aren’t taxed | Taxed at ordinary rates | Traditional withdrawals are taxed at ordinary rates; Roth withdrawals aren’t taxed | Taxed at ordinary rates |
| Pros | Simpler for employers to set up than Solo 401(k)s; employers get tax deductions on contributions | Allows small-business owners to make both employee and employer contributions for themselves; has higher contribution limits than some other plans | Employees can contribute up to 100% of compensation, up to limit | Easy to set up and maintain; no minimum employee coverage requirements | Employee might be able to borrow penalty-free from vested balance before retirement age (although borrowed amounts are subject to income tax) |
| Cons | Lower contribution limits for sole proprietor than a Solo 401(k); doesn’t allow catchup contributions; employer contributions are discretionary | More complicated to set up than a SEP IRA; only allows withdrawals before age 59 ½ for disability or plan termination | 25% penalty on distributions made before age 59 ½ and within the first two years of the plan; no loans allowed | Employees subject to Roth and traditional IRA eligibility requirements | Vesting period is generally required; no diversification, tied to employer earnings |
| Good to know | There is a different calculation to determine allowable SEP contributions if you’re both the employer and employee(See the IRS SEP IRA worksheet.) | Employer contributions might be subject to vesting terms | Distribution rules penalize rollovers to another account within the first two years of plan ownership; a SEP IRA or Solo 401(k) might be better for the self-employed | The employer chooses the provider | Contributions are at employer’s discretion and can vary by year; employee share based on salary and job level |
We hope the above information has helped you decide on a retirement plan best suited to your individual needs. But let’s be honest: Not everyone has the time or desire to become a financial expert. There are a few additional considerations that self-employed people need to make when thinking through which plan is best. In this instance, it’s best to consult with your trusted financial advisor.
Work with APO Financial
It’s never too late to start making retirement plans, and there’s an account for every type of income. As mentioned, virtually all retirement plans offer a tax advantage, whether it’s available upfront during the savings phase or when you’re taking withdrawals.
The financial advisors at APO Financial can discuss more options and reasons to have a particular retirement plan. If you would like to know about your options, sign up for a complimentary financial review. We can work with you to decide on allocation and contribution strategies, help you create a financial plan after you stop receiving a paycheck, and provide options for turning your savings into lifetime retirement income. Contact us here today to get started.
© 2021 APO Financial. All rights reserved. Disclosure: Investment advice is offered through APO Financial Services, LLC (“APO") 10155 Westmoor Drive, Suite 175, Westminster, Colorado 80021-2627, an investment adviser registered with the Securities and Exchange Commission. Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services offered or that its personnel possess a particular level of skill, expertise or training. Important information and disclosures related to APO are available at https://apofinancial1.wpengine.com. Additional information pertaining to APO’s registration status, its business operations, services and fees, and its current written disclosure statement is available on the SEC’s investment adviser public website at https://www.adviserinfo.sec.gov. Information relating to annuities is intended for educational purposes only and should not be construed as comprehensive or all-inclusive. Therefore, it should not be regarded as a complete analysis of the subjects discussed and should not be used to make an investment decision. Annuities can be an important part of an overall portfolio but may not be appropriate for everyone. Before purchasing an annuity, it is important to understand the details of the product. Certain products may not be available in your state. The terms of each indexed annuity varies. It is always important to speak to a financial professional. about an annuity’s features, benefits and fees, and whether an annuity is appropriate for you, based on your financial situation and objectives. Participation rates, cap rates and/or index spreads may be subject to change by the insurance company according to the annuity contract provisions. If the insurance company makes such changes, this could adversely affect the return. Guarantees of an indexed annuity are backed by the claims-paying ability of the underwriting insurance company. The surrender charge period for a product may be longer, and the surrender charges may be higher than other annuity products. Indexed annuities are long-term investments. If the annuity contract is surrendered early, there is the possibility of a surrender charge being imposed and/or the funds may be subject to income taxes. The IRS may also impose a 10% penalty on withdrawals prior to age 59 ½, depending on the circumstances. With indexed annuities, there is the potential to lose money, depending on the product charges and minimum guarantee contract provisions. For additional information on annuities, reference the following websites: The FINRA (www.FINRA.org), the Securities and Exchange Commission (www.SEC.gov), Insured Retirement Institute (www.irionline.org), the National Association of Insurance Commissioners (www.NAIC.org) or your state's insurance department.