I spend quite a lot of time on this blog talking about saving for retirement.  However, until today, I haven’t spent any time clarifying WHERE to put that savings.  What exactly is a retirement account? Where does one find these accounts to use for that retirement savings?  How do I choose if I have more than one choice?

What is a “retirement savings account”?

When one speaks of saving for retirement, they are usually talking about money that will not be used until after they stop working for income AND landing that money in a tax-advantaged account where it grows without the burden of taxes, including when you invest it (Traditional savings) or when you use it (Roth savings).

Where do I find these accounts:

US News & World Report ran this article last month that does a good job of describing the main types of tax-advantaged accounts available for retirement savings.  Here’s a quick recap:

  1. Employer sponsored plans:  401(k) or 403(b), many people have these plans through their work.  The beauty of these plans is the higher contribution limit and tax-treatment choices (Traditional or Roth) along with matching contributions from the employer (FREE money!).  There are no income limitations on these plans, and contributions are automatically (easily!) deducted from you paycheck.
  2. Small business plans:
    • Solo 401(k)s:  like a standard 401(k) except for a solo business owner + spouse
    • SIMPLE IRA:  small business plan that allows a higher limit like 401(k), allows for both employer and employee contributions
    • SEP-IRA:  similar to SIMPLE IRA except only the employer can make contributions
  3. Individual accounts:
    • Traditional IRA:  you fund with pre-tax money, taxable withdrawals in retirement, lower contributions limits than employer sponsored plans with income limitations that apply to contributions
    • Roth IRA:  you fund with after-tax money, tax-free withdrawals in retirement, also with lower contribution limits and income limits on contributions
    • Health Savings Account (HSA):  tax-free investment account for healthcare costs only before age 65, but any balance not used before age 65 can still be withdrawn tax-free for medical expenses OR at the individual’s regular income tax rate for any other reason

How do I choose?

Choosing the right combination of retirement savings accounts requires answering some basic questions:

  • How much can I save annually toward the goal of retirement?  (i.e. do I need both a 401k and an IRA to meet that goal)
  • Does my employer offer a plan, and is there “free money” from my employer to help boost my savings?
  • What are my investment options within the accounts and the costs associated with those options?
  • Do I expect my income tax burden to be higher now or in retirement? (choosing Traditional or Roth)

If you need some help taking the first steps toward a more secure retirement, schedule a free call with me here.  If you are a small business owner who would like to provide more options for yourself and your employees, I can assist you with implementation of the employer sponsored plan that best fits your needs and those of your employees.

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