We all know we should save for retirement, but how and where should we do it? There are multiple types of retirement accounts, from the 401(k) or 403(b) you may have at work, to an individual IRA and a number of 401(k) equivalents for the self-employed. Which account is right for you depends on your personal situation.
You can open any one of these accounts at any number of financial services providers, including your bank, a brokerage service or sometimes even your credit union. Once you have the account, you can invest your money in a number of ways, including via mutual funds and individual stocks and bonds. When you open the account, make sure you understand the fees involved, both with the account and with the investments within the account. High fees can eat away at your profits.
The IRS has rules for all these kinds of account, as well as contribution limits. You can see those here. If your financial life is complicated, an accountant can help you determine which retirement savings option is best.
SEVEN RETIREMENT ACCOUNTS TO CONSIDER
Employer 401(k) or 403(b)
This the best place to start saving for retirement. You can set up payroll deductions to save before you even see the money. In 2018, you can save up to $18,500 of your pretax income ($24,000 if you are 50 or older).
If you change jobs, you can roll the money over into your new employer’s program or your IRA. You are likely to be offered a 401(k) if you work at a for-profit company and a 403(b) if you work for the government or nonprofit.
You can contribute up to $5,500 ($6,500 if you’re over 50) to an IRA. If you have both an IRA and a 401(k), you can’t deduct your IRA contributions if you earn more than $71,000 annually (for single filers) or $118,000 (married filing jointly).
Those earning $61,000 (single) and $98,000 (married) get only a partial deduction. However, the income limits don’t apply if you’re not covered by a retirement plan at work — unless you file jointly with a spouse who is.
A SEP (simplified employee pension) is for small business owners and the self-employed. You can contribute up to 25 percent of your income or $55,000, whichever is less, in 2018. If the business has employees, the employer is required to make contributions for all who meet certain requirements.
Solo 401(k). If you own your own business as a sole proprietor, you can set up an individual 401(k) and make contributions as both the employee and employer. The contribution limit is a total of $53,000 in 2016 (or $59,000 if you’re over 50).
Simple IRA. With a Simple IRA, employers with fewer than 100 employees can set up IRAs with less paperwork. The contribution limit for employees in 2016 is $12,500 in ($15,500 for those over 50). Employers can make either matched or unmatched contributions.
Roth IRA. Contributions to a Roth IRA are not tax-deductible, because you are contributing after-tax dollars. But, the money you earn grows tax-free. Unlike with a regular IRA, you pay no tax on withdrawals after 59 1/2. You also don’t have to withdraw anything at age 70, as you do with a regular IRA. Plus, even before you’re 59 ½, you can withdraw your contributions (but not your earnings) without taxes or penalties.
You have to meet income limits to contribute to a Roth IRA. In 2016, you must make less than $132,000 (single) or $194,000 (married filing jointly). Your contribution is reduced if you make more than $117,000 (single) or $184,000 (married filing jointly. Some people whose income doesn’t allow them to contribute to a Roth IRA make contributions to a regular IRA and convert the account into a Roth later.
Health savings account. This isn’t considered a traditional requirement account, but it is a way to save for retirement expenses. To have an HSA, you must choose a high-deductible health insurance plan that allows for one. An individual can contribute up to $3,350 a year in 2016; a family can contribute $6,750. Those 55 or older can add $1,000. Before you retire, you can withdraw money for certain medical expenses – but you don’t have to withdraw it. Any money you don’t spend stays in your account, and you can invest it. Until you’re 65, you can take money only only for allowed medical expenses, but after 65 you can use the money for anything you want, though you’ll pay taxes on those withdrawals. If you withdraw money for medical expenses in retirement, the withdrawals are tax-free. Before you turn 65, any money withdrawn for anything but medical expenses requires taxes and a 20 percent penalty. However, if you save your receipts for medical expenses you don’t reimburse yourself for at the time (eyeglasses, co-pays, etc), you can reimburse yourself years later without penalty or tax liability.
Teresa Mears is a personal finance writer and executive editor of Living on the Cheap, a website that helps readers live better on less. She specializes in writing about real estate and retirement.