You know you need to save money for your retirement. Whether you plan to work until you’re 70 or hope to retire early, you need to have enough money and investments to ensure you can meet your expenses and enjoy your retirement years.
At Addition Financial, we work closely with our members to help them save for retirement. One of the most common questions we hear is this:
“Which retirement savings plan do you recommend?”
Of course, not every retirement savings plan is ideal for every member. We have several plans we recommend depending on your needs. In this article, we’ll fill you in on our favorites and provide you with a link to a retirement savings calculator, so you can estimate your savings with each plan.
#1: Employer-Sponsored 401(k) or 403(b) Plans
One of the most common types of retirement savings plan is the 401(k) plan, which is sponsored by your employer. You can contribute pre-tax money from your paycheck and decide how to invest it. If your employer is a non-profit organization, church, school or government organization, you may have a 403(b) plan instead.
If your employer offers matching funds for your 401(k) or 403(b) plan, you should take advantage of it. You’ll probably need to meet a minimum contribution threshold to qualify, but matching funds can help you jump-start your retirement savings.
As of 2019, you may contribute up to $19,000 to your 401(k) or 403(b) plan. You can find additional information on the IRS website, here.
#2: Solo 401(k)
If you’re self-employed, you might consider an individual retirement plan like a solo 401(k), sometimes referred to as a solo-k or one-participant 401(k).
The basic set-up of a one-participant 401(k) is similar to that of an employer-sponsored plan, except that the plan holder is both the employer and the employee. As of 2019, you may contribute $19,000 in pre-tax income to your solo 401(k), or up to $25,000 if you’re over the age of 50. You can find more information here.
#3: Traditional IRA
A traditional IRA is an individual retirement plan you own and contribute to. To contribute to a traditional IRA, you must have income that matches or exceeds the amount of your contribution and be under the age of 70 ½. As of 2019, the contribution limits for a traditional IRA are:
- $6,000 per year for individuals under the age of 50
- $7,000 per year for individuals 50 years old or older
With a traditional IRA, you must begin withdrawing funds when you reach the age of 70 ½. Withdrawals made before the age of 59 may be penalized.
You may contribute to a traditional IRA and a Roth IRA at the same time, as well as a 401(k) account. However, you may not be eligible for the full deduction for each account if you have multiple accounts. You can find more information here.
#4: Roth IRA
A Roth IRA offers a bit more flexibility than a traditional IRA. With a Roth IRA, you may:
- Continue to contribute to the IRA provided you are earning income
- Withdraw contributions at any time without penalties
There are penalties for withdrawing investment income unless you have owned the Roth IRA for at least five years and meet any one of the following conditions:
- You’re age 59 ½ or older; or,
- You’ve become disabled; or,
- You’ve died and your heirs are withdrawing money; or,
- The withdrawal is for a first-time home purchase (up to a $10,000 limit).
Like traditional IRAs, the contribution limit for 2019 is $6,000 if you’re under 50 and $7,000 if you’re 50 years or older.
The final thing you need to know about a Roth IRA is that there is no age when you must withdraw funds. People sometimes use a Roth IRA to grow investments and leave money to their children or grandchildren.
#5: SEP IRA
A simplified employment pension, or SEP IRA, is a good option for people who are self-employed or own small businesses. They offer higher contribution limits than traditional or Roth IRAs, and they are simpler to set up and administer than a solo 401(k).
As of 2019, the contribution limit for employers is 25% of your income up to a maximum of $56,000. If you choose to set up a SEP IRA and you have employees, you will be legally required to contribute to the plan on behalf of employees who meet the requirements. You can read more about it here.
Retirement Savings Calculators
It can be difficult to figure out what you’ll need to save to have the retirement you want. One of the best ways to do it is to use a retirement savings calculator. We have 16 free retirement-focused calculators that you can use anytime! Click here to access our calculator resource center.
You have choices when it comes to how to save for your retirement. The five types of accounts we’ve listed here are all reliable ways to save.
Need help planning your retirement? Click here to learn about Addition Financial’s investment accounts or schedule an appointment with one of our financial advisers.