The Ultimate Guide To Choosing The Right Retirement Account

There will come a day when you decide that you are too old to work and want to enjoy the rest of your years here on earth. If you plan to take this long-awaited break from the mainstream, then you need to prioritize saving for your future.

When choosing a retirement account, consider the following: employer contributions, your income tax bracket, and how much you want contribute. The goal to choosing an account is to try and maximum the amount within the account, while lowering taxes on withdrawals as much as possible.

You need to know what types of retirement investment accounts are out there and how to choose the right one for you.

When we first started saving for retirement years ago, we were overwhelmed by all of the different options. What was the difference between a 401(k) and an IRA? Were we allowed to have both? How do employer contributions work?

Our list of questions was practically endless until we sat down with a financial advisor who spelled everything out for us in terms we could easily understand.

While meeting with a financial advisor may not be for everyone, you do need to educate yourself on the different types of retirement investment accounts that are available to you.

If you are ready to learn more about saving for your retirement, this complete guide will give you everything you need to know to confidently start saving more money.

How to Choose the Right Investment Account for You

If you are thinking about starting your retirement investment account (and you should be!), then you need to know which one is the right fit for you.

While some of the options are not available to all individuals, many people can sign up for numerous types of accounts.

How do you know which one is the right fit for you? These tips will help you clear the clutter and narrow down your options.

Tip 1: Consider Employer Contributions

If your employer offers to match your contributions, even up to a certain percentage, it is always advised to take advantage of this.

You should always contribute the maximum amount that they will match.

For example, if your employer offers a match of up to 3 percent of your compensation, then you should contribute the full 3 percent to take advantage of this benefit.

Unlike contributions that you may make to a traditional or Roth IRA, this money does not come directly from your paycheck.

Money given to you by your employer for the purposes of retirement savings is essentially free money.

You will never have to pay it back and it can grow tax-deferred in most of the retirement savings accounts listed here.

It doesn’t particularly matter what type of retirement investment account your employer offers.

If they are willing to match your contributions, you should take advantage of this free money and allow it to work hard for you.

You can always opt to open a second retirement investment account if you want to contribute more than the maximum match into a different type of account.

To give an example, you could contribute your 3 percent and have it matched in a 401(k) or a SIMPLE IRA.

If you wanted to contribute more than 3 percent of your pay toward retirement, you could open a second traditional IRA to accommodate those funds.

Tip 2: What Tax Bracket Are You In?

Most of the investment accounts you can use to save for retirement come in either a Roth or a traditional version. Trying to figure out which one to choose can be confusing as both have their unique benefits.

The easiest way to determine which one you should use is to estimate what tax bracket you are in now and what tax bracket you hope to be in at retirement.

Most people will find themselves in a lower tax bracket in their retirement years.

If this describes you, then a traditional account may be the way to go.

You will get the tax benefit now of lowering your taxable income in exchange for paying taxes on the funds when you begin to take distributions.

If you believe that you will be in a higher income tax bracket in retirement, then a Roth account is the way to go.

You will pay taxes on the money upfront which unfortunately puts less in your pocket right now and has no immediate tax benefits.

However, you will not have to pay any taxes on it when you go to withdraw the money in the future.

When my husband and I were making calculations of what we project our income will be in retirement, we estimated that we would actually be in a lower tax bracket.

As a result, we decided to invest our funds in a traditional IRA and will pay taxes on the distributions when we go to withdraw money.

It makes the most sense for us right now as it allows us to take the tax benefits and gives us a larger sum of money that can grow tax-deferred until our retirement.

Tip 3: How Much Do You Want to Contribute?

The amount that you want to contribute toward your retirement accounts also plays a huge role in determining what type of account you should open.

A 401(k) or a 403(b) offered through your employer typically has the highest contribution limits.

With these two types of accounts, you can contribute up to $19,500 plus catch up contributions if you are over age fifty.

Traditional and Roth IRAs have significantly lower contributions limits of just $6,000.

Keep in mind that you can also mix and match different retirement investment accounts so that you can contribute more toward your retirement.

A good rule of thumb is to save 15 percent of your income for the future when you want to stop working and enjoy your golden years.

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Choosing Between The Different Types of Retirement Accounts

Before you can figure out which type of retirement investment account is right for you, you need a quick crash course in the different types available.

There are lots of different types of savings accounts out there, but we will dive into the five most popular types that most people encounter and select for their retirement savings.

401(k)

Traditionally, a 401(k) is offered through your employer but individuals who are self-employed with no employees may also qualify to set up a solo 401(k).

The rules about how much you can contribute are a bit different, but the overall qualities of the program remain the same.

One of the benefits of a 401(k) sponsored by your employer is that they will often match your contributions up to a certain amount.

This is a great way to make good use of money that is freely given to you to help you reach your retirement goals.

If this is offered, it is recommended to contribute the full amount of what your company is willing to match to take advantage of this generous offer.

With this type of investment plan, you are allowed to choose from a selection of investments offered that were initially chosen by your employer.

Oftentimes, these options are a combination of stock and bond mutual funds or target-date funds.

A target-date fund adjusts the risk of your portfolio as you near retirement age to decrease the amount of risk you are willing to take when you will need to access those funds shortly.

There are two different types of 401(k) accounts, just like there are two types of IRAs.

A traditional account deducts contribution money from your gross wages and can be written off as a tax deduction for the year.

Instead, taxes are paid when you withdraw the funds from the account.

On the other hand, a Roth 401(k) deducts money from your after-tax dollars and no money will be taxed upon withdrawal in retirement.

If you plan to use a 401(k), you must be at least 59 ½ to withdraw funds from the account or face steep penalties.

In general, you will face a 10 percent early-distribution fee in addition to any taxes you might already owe on the funds in the case of a traditional account.

Employees are able to contribute up to $19,500 annually until they reach age 50. Anyone over this age can make an additional catchup contribution of $6,500.

Benefits of a 401(k):

• Tax advantages depending on whether you enroll in traditional or Roth
• High contribution limits
• Potential for employer matching
• Can take the account with you if you leave your current job
• Can borrow against the funds in the investment account

403(b)

If you work for a non-profit company or a public school, then you may qualify to make contributions to a 403(b) plan.

This is very comparable to the 401(k) offered by many employers, but there are a few differences here.

One of the main differences is in the options you can invest in.

A 403(b) account is often much more limited in the different types of investment products you can select.

The other major difference lies in catch-up contributions.

If you have been with the same employer for fifteen years or longer, you may be eligible to make certain catch-up contributions that you are not eligible for with a 401(k).

Unlike other retirement plans, there is no minimum age required to take advantage of these extra contributions.

With a 401(k) and other retirement investment accounts, you may have to be fifty years of age or older to make catch-up contributions.

Much like the 401(k), you can enroll in either a traditional 403(b) or a Roth 403(b).

The difference lies in whether the money is taxed in retirement (traditional) or taxed now (Roth).

Benefits of a 403(b)

• Potential for employer matching
• High contribution limits (up to $19,500 plus catchup contributions of $6,500 for ages 50 or older)
• Additional contributions for employees who have been with the company for more than 15 years
• Tax-deductible contributions for traditional 403(b)
• Loans can be taken against plans

Traditional IRA

Most people have heard of individual retirement accounts, more commonly referred to as IRAs.

There are several different types of IRAs that are popular options for your retirement investment account. The first type is the traditional IRA which shares many features of the traditional 401(k).

Contributions made to a traditional IRA are tax-deductible at the time of making the contribution.

This can be great because it lowers your taxable income for the year and may even place you in a lower tax bracket.

Meanwhile, the money that you have invested in your IRA will grow tax-deferred until you make a withdrawal.

This is the ideal retirement investment account if you believe that you will be in a lower tax bracket upon retirement.

Most people will make less in retirement and therefore choose to invest their funds this way.

Unfortunately, the contribution limits on a traditional IRA are much lower than what you can contribute to a 401(k).

In 2022, individuals under age fifty are only allowed to contribute $6,000 annually.

That number jumps to $7,000 when you reach the golden age of fifty or older.

One of the reasons that many people love the traditional IRA is that it is more flexible in terms of what you can invest in.

A 401(k) or a 403(b) has a rather limited list of possible investments for you to choose from.

With an IRA, you can invest in almost any stock, bond, mutual fund, or ETF that you want. This allows you to calculate how much risk you truly want to take with your investment account.

You must start to take distributions by age 72 when you have a traditional IRA.

If you do not cash the checks from your account, you may be hit with a 50 percent penalty excise tax on the money you were supposed to withdraw and didn’t.

Benefits of a Traditional IRA

• Tax deduction for contributions
• Tax-deferred investment compounding
• Flexibility to invest in different stocks, bonds, and mutual funds

Roth IRA

The Roth IRA is extremely similar to the traditional IRA with one key difference.

Instead of investing pre-tax dollars into your retirement account, you will contribute after-tax dollars.

This does not give you any type of tax deduction at the end of the year and does not help to lower what tax bracket you are in.

While your money is invested, it does grow tax-free just like the traditional IRA.

Instead of paying money when you withdraw your funds, as you would in a traditional IRA, you pay nothing when you withdraw it in retirement.

This is the ideal option for anyone who feels that their income level may actually be higher in retirement than it is currently.

While these individuals are often few and far between, it is an important distinction that you want to consider.

The annual contribution limits are the same in both IRAs.

You can contribute up to $6,000 if you are under the age of fifty. If you are over this age, you can contribute up to $7,000 annually.

You also have the same flexible investment opportunities with a Roth IRA as you have with a traditional IRA.

It is best to diversify your holdings by investing in a variety of stocks, bonds, mutual funds, and ETFs.

If you invest all of your retirement investment account in a single stock that goes bankrupt, you may lose all of your funds.

However, you do have the freedom and flexibility to choose what you want to invest in and how much risk you are willing to tolerate.

Unlike a traditional IRA, there are no required minimum distributions with a Roth IRA.

You are permitted keep your money in your account for as long as you like, allowing it to continue to grow tax-free.

This also means that you won’t be forced into selling your assets at a bad time where you might lose money on your initial contributions.

Benefits of a Roth IRA:

• Tax-free withdrawals in retirement or after death for heirs
• No required minimum distributions
• Flexible investment options

SIMPLE IRA

A Savings Incentive Match Plan for Employees, better known as the SIMPLE IRA, is an employer-sponsored retirement investment account.

It allows your employer to contribute to a traditional IRA set up for the employees.

This type of retirement investment account is very common among small businesses who may not have access to a larger retirement plan just yet. They are much lower in start-up and operating costs.

When it comes to contributions, you really can’t go wrong with a SIMPLE IRA. Employers are required to either do a matching contribution up to 3 percent of your compensation or a 2 percent nonelective contribution for eligible employees.

The nonelective contribution can be a bit confusing for people, but it essentially means that your employer must contribute 2 percent of your compensation even if you choose not to contribute anything to your own account.

One of the main benefits of a SIMPLE IRA is that you are 100 percent vested in the account at all times.

This means that you have complete ownership and autonomy over those funds, even if you leave the company. The money you invest grows tax-deferred until it is withdrawn at the time of retirement.

The SIMPLE IRA has a larger contribution limit than the traditional and Roth IRAs do.

In 2022, an employee can contribute up to $14,000 to their SIMPLE IRA. You may make up to $3,000 in catchup contributions once you pass the age of fifty.

There is still a lot of flexibility in what you can invest in with a SIMPLE IRA.

According to the IRS, you can invest in individual stocks, mutual funds, and other similar types of investments. You may be able to focus on growth, growth and income, target-date funds, and more.

Benefits of a SIMPLE IRA: 

• Higher contribution limits than other IRAs
• Flexible investment options
• Employer contributions

Choose The Right Retirement Account For Your

Setting up a retirement investment account can feel overwhelming. You have to consider so many different things: employer contributions, contribution limits, tax benefits, and more.

A 401(k) and a 403(b) are very similar investment options offered through your employer. Oftentimes, they come with a match from your employer and feature high contribution limits.

Both traditional and Roth IRAs give you more flexible investment opportunities but have lower annual contribution limits.

A SIMPLE IRA is a great option for your employer to match the funds that you contribute to your account.

No matter which type of account you choose, you have to do what is right for you.

Consider whether your employer offers any type of matching, what tax bracket you hope to be in during retirement, and how much you plan to contribute to the plan each year.

All of these items can help you to make a wise decision about where to invest your retirement savings!