What Are the Common Types of Retirement Accounts?

Whether we’re getting older and nearing retirement, wondering if we have enough, or if we are young and starting out, getting ready to contribute to our first fund, we wonder—how much is enough? And, when should we start contributing? And even more so, what are the different types of retirement accounts? Which of those retirement accounts will provide the greatest return on investment?

Understanding the answers to those questions is integral to help you get started with your retirement planning. There are a variety of retirement accounts available to help you do just that. In this article, we’ll explore the most common options to ensure you’re in the know. 

Why is Retirement Planning Important? 

Remember that hypothetical question we asked earlier? How much in your retirement account is enough? Well, the truth is that planning for your retirement never ends. And while most investment advisors and financial planners will suggest you put away at least 15% of your pre-tax dollars, know that this is not a one and done. In fact, you should leverage your family budget—or personal budget—from as early as possible to make sure this money gets tucked into one or more of the types of retirement accounts we’ll discuss shortly. 

Retirement planning isn't just about saving; it's about securing your future. It ensures that once you stop working, you can maintain a comfortable lifestyle without financial worries. As people are living longer thanks to advances in healthcare, the importance of planning grows. Your retirement could last as long as your career, so preparing for a longer period of financial independence is a must. 

Additionally, retirement accounts often come with tax benefits, making them a smart choice for saving money now and in the future. Here’s why retirement planning is so important:

• Financial Security: Making sure that you have enough funds to cover all your needs without reliance on employment income.
• Comfortable Lifestyle: Enabling a lifestyle in retirement that is as good, if not better, than when you were working.
• Longevity: With people living longer, having enough savings to support yourself for many years post-retirement is essential.
• Tax Benefits: Utilizing retirement accounts can provide significant tax advantages, reducing your tax burden now while saving for the future.

Popular Employer-Sponsored Retirement Accounts to Know 

Without further ado, let’s get into that list of the different types of retirement accounts that we promised we would share. Here are the common contenders.

401(k) Plans 

A 401(k) plan is a common employer-sponsored retirement account that gives employees the opportunity to save a part of their paycheck before taxes are taken out, up to a limit of $22,500 for those under 50 in 2024, with an additional $7,500 allowed as a catch-up contribution for those 50 and older. 

Many employers offer to match a portion of these contributions, effectively growing the employee's savings. The tax benefits include lowering your total taxable income through pre-tax contributions, enhancing the plan's appeal.

403(b) Plans

Specifically designed for employees of public schools, certain non-profit organizations, and some ministers, 403(b) plans operate similarly to 401(k) plans. These plans allow participants to make pre-tax contributions, which reduce their taxable income. Contributions grow tax-deferred until they are withdrawn at retirement, potentially at a lower tax rate, providing significant tax advantages.

457(b) Plans

Available to state and local government employees, as well as some non-profit workers, 457(b) plans share similar contribution limits to 401(k) plans. A distinctive feature of these plans is the lack of an early withdrawal penalty if you leave your job, although withdrawals are still taxed as income. This plan is particularly flexible for those who might change jobs or retire early.

Thrift Savings Plan (TSP)

The Thrift Savings Plan is the federal government’s equivalent to a 401(k) and is available to federal employees and those in the uniformed services. It offers a variety of investment options, including government securities and international stocks. The government matches contributions up to a certain limit, and participants can choose between traditional (pre-tax) contributions, which lower taxable income, or Roth contributions, which are made after-tax but allow for tax-free withdrawals in retirement.

Types of Individual Retirement Accounts (IRAs)

Another popular option to help you grow your wealth and retirement savings comes in the form of an individual retirement account (IRA).

Traditional IRA 

The Traditional Individual Retirement Account (IRA) is a tool for saving pre-tax income, which then grows tax-deferred until it is withdrawn during retirement. This means you won't pay taxes on the earnings until you start taking money out, typically after you reach 59½ years old. For 2024, the contribution limit is set at $6,500, or $7,500 for those age 50 and older. It's important to note that withdrawals must start by age 72, and taking money out before age 59½ generally incurs a penalty unless specific exceptions apply.

Roth IRA

A Roth IRA allows for after-tax contributions with the benefit of tax-free growth, meaning you pay taxes on the money going into your account but not when you withdraw it in retirement. The investment grows tax-free, and withdrawals are tax-free too if the account has been open for at least five years and the holder is over the age of 59½ or meets other conditions such as using funds for a first home purchase. The annual contribution limits are the same as those for Traditional IRAs.

SEP IRA

The Simplified Employee Pension (SEP) IRA is designed for self-employed individuals and small business owners. It allows for a significant contribution of up to 25% of income or $66,000 in 2024, whichever is less. This type of IRA is favorable for those who wish to save substantially more than what's allowed under traditional or Roth IRAs. Contributions are made solely by the employer and are tax-deductible.

SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is tailored for businesses with 100 or fewer employees—aka small businesses. It allows both employee and employer contributions, with employees being able to contribute up to $15,500 in 2024, and those 50 or older can add an additional $3,500 as a catch-up contribution. Employers must either match employee contributions or make non-elective contributions to all eligible employees, and like other IRAs, contributions are pre-tax, thereby reducing taxable income for the year they are made.

Self-Employed and Miscellaneous Retirement Accounts

Many people mistakenly believe that if they start their own business or turn their side hustle into a full-time gig, that they are not eligible to participate in a retirement account. Thankfully, that is not the case and there are several options available for those who are self-employed. Here are the plans available to help.

Solo 401(k)

The Solo 401(k) is an excellent retirement saving option specifically designed for self-employed individuals or business owners with no employees other than themselves and possibly their spouse. This plan allows large annual contributions—up to $66,000 in 2024, including catch-up contributions if you're over 50—mirroring those available in traditional employer-sponsored 401(k) plans. The Solo 401(k) offers flexibility in contributions and tax benefits, with options for either pre-tax or Roth contributions.

Keogh Plans

Historically referred to as "Keogh plans," after the law that first permitted unincorporated businesses and self-employed individuals to sponsor retirement plans, these are now more commonly known simply as HR-10 or qualified plans. The original designation came from legislation introduced by Representative Eugene Keogh. 

However, modern tax laws no longer differentiate between corporate and other plan sponsors, making the term "Keogh plan" less common. These plans can be set up as either defined benefit or defined contribution plans, and they offer high contribution limits and tax benefits, similar to those found in other employer-sponsored retirement plans.

Pension Plans

Pension plans, or defined benefit plans, are traditionally offered by some employers and guarantee a fixed payout at retirement, calculated based on factors such as salary history and length of employment. While less common today in the private sector, they are still prevalent in public sector organizations and offer the security of a predictable income in retirement.

Cash Balance Plans

A type of defined benefit plan, Cash Balance Plans combine features of both traditional pension plans and defined contribution plans. They work by crediting the participant's account with a set percentage of their yearly salary plus interest charges. For business owners and high-earning self-employed individuals, these plans can significantly increase retirement savings and offer tax benefits.

Annuities

Annuities are insurance products that provide a steady stream of income in retirement, purchased either through a lump sum or a series of payments. They can be set up to pay out for life or for a specific number of years and are often used to help manage the risk of outliving one's savings. Annuities vary widely in terms of structure and fees, so it's important to choose the type that best fits your financial goals and retirement strategy.

Start Planning for Tomorrow, Today 

Retirement planning begins with achieving financial stability in your current situation. If you find yourself needing immediate financial assistance to stabilize your situation, consider that short-term loans such as a cash advance loan may serve as a bridge to help you manage until you can make more permanent arrangements. These loans can provide the quick support you need to continue investing in your future. Don't wait to get your finances on track—get started today. Apply for a loan now and take the first step towards a secure retirement.

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