5 Types of Retirement Accounts | Secure Your Future Today

Time is your biggest asset when it comes to planning and investing for retirement. The golden years might feel like a long way off, but retirement is likely the largest expense you’ll have in your lifetime. The sooner you get started investing, the better set up you’ll be.

We’re demystifying your options and laying out the pros and cons of five types of retirement accounts. We’re also outlining those new 2024 contribution limits—so you can take action now, and capitalize on your time investment.

Let’s start securing your financial future!

Retirement Accounts - The Lingo

You’ve likely heard lots of terms thrown out there when it comes to your investing options for retirement. Let’s dive into what they all actually mean—

• Retirement Account: A type of financial account specifically designed to help you save for retirement. It’s important to explore the types of retirement accounts and the specific tax advantages of each.
• Retirement Plan: Your retirement plan is a comprehensive strategy outlining how you intend to fund your retirement. This includes outlining your savings goals, choosing the best type of retirement account for you, and making an investing strategy.
• Individual Retirement Account: Known as an “IRA,” this is a tax-advantaged retirement savings account for individuals. An IRA is different from a retirement account you may get from an employer, such as a 401(k) plan.
• Contribution Limits: The maximum amount you can contribute as an individual to certain retirement accounts within a specified period (usually the current tax year). Contribution limits vary based on the type of account you’re putting money into.
• Distribution: This refers to the withdrawal of funds from a retirement account to fund living expenses during retirement. Some types of accounts have minimum distribution requirements, where you must begin withdrawing a certain amount after you turn 72.

Types of Retirement Accounts – Individual

Individual Retirement Accounts (IRAs) are available to everyone, making them extremely popular. Many of us aren’t eligible for a workplace retirement plan—or if we are, we’d still like to take advantage of an IRA in our financial plan.

There are two types of IRA accounts — Traditional and Roth. Both are extremely easy to open yourself. It’s important to understand the tax advantages (and limitations) of both when deciding which IRA is best for your goals.

Investment Options: A versatile range of investment choices are available to you with an IRA. This gives you more control over your money and allows you to better diversify your portfolio. Common options include—mutual funds and ETFs, individual stocks, and bonds.

You’ll typically have access to more diversified investing options with an IRA than with a workplace retirement account.

Annual Contribution Limits: One potential drawback of an IRA is that they have lower contribution limits than other tax-advantaged retirement accounts.

For 2023, you can contribute up to $6,500 ($7,500 if you’re 50+) into a traditional IRA, Roth IRA, or a combination of the two.

That limit is increasing for 2024 to $7,000 per tax year. If you’re 50 or older you can contribute an additional $1,000 as a “catch-up contribution” bringing the total to $8,000 for the year.

That’s a $500 increase from 2023 across the board. But, that amount is still a lot lower than other types of retirement accounts.

The Traditional IRA

Tax Advantages: Anyone is eligible for a Traditional IRA, no matter your income level.

Your contributions to the account are tax-deductible, reducing your taxable income. This means you get immediate tax benefits, as opposed to the potential long-term tax incentives of the Roth IRA.

With a Traditional IRA, your money grows in the account tax-deferred until you begin to withdraw it. At that time, you’ll be taxed on withdrawals at your current tax rate.

If you’re looking to take advantage of immediate tax deductions, a Traditional IRA may be a good bet for you. Especially if you anticipate having a lower tax rate in retirement than you have now.

Distributions: With a Traditional IRA, you’re required to start taking minimum distributions after you turn 72.

If you withdraw funds before you hit 59 ½, you’ll be hit with a 10% penalty for any early withdrawals. Certain exceptions apply to this penalty. But unless you meet one of the specific requirements, you’ll be penalized for any early withdrawals.

The Roth IRA

Tax Advantages: The Roth IRA differs from the Traditional IRA in that your contributions are made with after-tax money. In other words, you’re paying taxes on the funds you contribute now, at your current tax rate.

This means that your money is growing for you tax-free, and all gains are yours. When you hit retirement age, you’ll benefit from tax-free withdrawals and won’t have to worry about the current tax rate.

For most, a Roth IRA is recommended over a Traditional IRA because you're paying tax at a rate you know. Versus waiting until retirement age when taxes could be much higher.

Eligibility: Unlike Traditional IRAs, Roth IRAs have income-based eligibility restrictions.

For single filers in 2024, if you make under $146,000 in modified adjusted gross income (MAGI) you can make the full $7,000 contribution per year. Your contributions are gradually reduced as soon as your MAGI goes above that mark.

If you’re making over $161,000 in MAGI per year, you’re not eligible to make direct contributions to a Roth IRA.

For married couples filing jointly, the full contribution amount is allowed with a combined MAGI below $230,000. Direct contributions aren’t permitted above a combined $240,000.

Distributions: A Roth IRA doesn’t have any minimum distribution requirements. This means your money can continue to grow for you tax-free, even after you hit retirement age.

Withdrawing funds early (before age 59 ½) without a qualified exception will still be hit with the 10% tax penalty.

Types of Retirement Accounts – Employer

401(k) Plans

401(k)s are one of the most popular employee retirement plans.

They boast high contribution limits and may include the coveted “employer match.” However, because the plan is through your employer, 401(k)s are typically more restrictive than IRAs in that they offer limited investment options.

• Annual Contribution Limits: 401(k) accounts have much higher contribution limits than IRAs.

For 2024, that number will be $23,000 for your contributions as an employee. Up from $22,500 in 2023.

• Employer Match Contributions: This is when your employer will match your contributions dollar for dollar. They’ll do this up to a certain percentage—for some employers that matching percentage can be as high as 100%! Check with your HR department for your company’s specific retirement program policies.

Consider this free money from your employer. And max out this contribution if you can!

Example: If you contribute 3% of your income each month, and your employer offers a 401k match program, they’ll contribute the same amount towards your 401(k) plan—essentially doubling your contribution.

Traditional 401(k)

• Tax Advantages: Contributions into a Traditional 401(k) reduce your taxable income. The money will grow for you tax-deferred, and then you’ll be required to pay taxes on your distributions (required at 72, penalized before age 59 ½ like with a Traditional IRA).

Roth 401(k)

• Tax Advantages: Some employers may offer a Roth 401(k) option. Like a Roth IRA, contributions are made with after-tax funds. Meaning, your withdrawals in retirement are tax-free.

However, unlike a Roth IRA that has no minimum distribution requirements, a Roth 401(k) requires you to start taking your minimum distribution at age 72.

SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan designed for accessibility. It’s very easy to set up and has straightforward contribution rules, making it an excellent option for small businesses.

• Employer Match Contributions: Like with a 401(k) plan, employers can (and often do) match employee contributions to provide an extra incentive for employees to participate.

• Annual Contribution Limits: Employees can make contributions up to $15,500 for 2023, and up to $16,000 for 2024. While these contribution limits are comparatively lower than other employer retirement plans, they still offer a meaningful opportunity for consistent savings.

• Tax Advantages: Contributions to a SIMPLE IRA are made pre-tax, reducing your taxable income for the year, providing the immediate financial benefit of tax savings.

SEP IRA (Simplified Employee Pension)

If you’re rocking a side hustle or own a small business, the SEP IRA (Simplified Employee Pension) is a great option.

• Annual Contribution Limits: SEP IRAs offer high contribution limits, making them especially beneficial for anyone who’s self-employed.

As an employer, you can contribute as much as 25% of each individual employee’s income (or up to $66,000 for 2023, and $69,000 for 2024).

If you’re self-employed, this gives you major benefits. As your own boss, you can contribute up to 25% of your employee income, and then you can contribute an additional 25% as an individual.

• Tax Advantages: Like with a Traditional IRA or 401(k) plan, contributions to a SEP IRA reduce your taxable income. Taxes will be paid on any distributions you make during retirement.

• Flexible Annual Contributions: One of the beauties of SEP IRAs is their flexibility. It’s up to you what you contribute yearly, and your contributions can adapt to your business’s cash flow needs. This gives you a great retirement savings solution that moves with you (and your business).

Secure Your Future

Aligning your retirement strategy with your unique financial goals and tax situation is key. Having a retirement plan isn’t just a good idea, it’s a financial game-changer for security and freedom in your golden years.

Now that you’re armed with all the info, it’s time to take action. Check-in on your own retirement plan. Choose the account type that works best for you, make your first contribution, and choose where to invest those funds.

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