What Kind Of Retirement Account Is Best For Me?

Planning For Retirement

     It’s a common question that people ask themselves when beginning to look at putting aside money for retirement. What kind of retirement account is the best one? We have the Traditional 401ks, Roth 401ks, Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. So which one is best? 

       It depends on your lifestyle plans, where you are now, and whether you want to pay your taxes now or later on your retirement savings. We’ll take them one at a time, but the simple answer is that none of them are wrong. Each one just works better for different people with different plans. 

The 401K

       The 401k is typically a bonus you get from your job. This is where you agree to putting a percentage of your pay towards your retirement, and your boss agrees to match part of your contribution or all of it into your account. Not bad, right? 

       In the Traditional 401k account, your money is being put in from your gross income, which just means that you haven’t been taxed on it yet. This enables you to put a bigger amount into your account sooner rather than later. But don’t think that you’re getting out of paying taxes. When you hit retirement and start pulling money from that account, now it’s time to pay taxes. Also, any growth your money made in the retirement account, is also taxed. Kind of a double whammy. 

      In the Roth 401k account, you’re putting in your money after it has been taxed. This means you’re putting in a smaller amount initially, but it also means that you’re not taxed on it later when you hit your retirement. Also, any growth your money makes in the Roth retirement account, is tax free, since you already paid your taxes. Not all employers offer Roth accounts though, but if they do, now you know the difference so that you can pick which one you prefer.

       Also, in either 401k account that you pick, you are the one that is responsible for picking where your investments go. I think that makes sense really. Your employer is not going to be responsible for picking a bad stock and accidently costing you your entire retirement. So they leave that up to you. You can either hire someone to help you with figuring out your choices, or do some reading on how best to pick stocks. They don’t have to be hard to understand, I actually find them a lot of fun. 

      If you want easy reading on the stock market, there’s an entire chapter on how to pick good stocks in my book: Your Simple Guide To Money Mastery. Here’s the link: https://a.co/d/6whgwQU

        The other thing to keep in mind with 401k accounts is that there is a limit to how much you are allowed to deposit each year. This gets adjusted with inflation, but for 2024; it is currently $23,000 for workers under age fifty. For anyone over age fifty though, they are allowed to make additional $7,500 contributions. 

IRA Accounts

         Now we get to the IRAs. Once again, there are both Traditional and Roth accounts to choose from, and now you probably already know what the difference is. But just in case not; the Traditional is where you put your money in before taxes, and get taxed later on your income, and the Roth account is where you put your money in after you’ve paid your taxes, so that any income you get in that account later is tax-free. As of 2024, the limit to how much you can put into your account is $7,000 a year. 

       Basically, picking between these two options; the 401ks, and the IRAs, depends on what you want. 401ks offer employer matches and have a higher yearly limit of what you can put in. IRAs do not have employer matches, and they have a higher amount of investment choices to offer. It depends on the kind of security or options that you prefer. 

SEP IRAs

       Small business owners can also make use of the SEP (Simplified Employee Pension) IRAs, which adhere to the same rules as the Traditional IRAs, in that the maximum allowed contribution per year as of 2024, is $69,000. This is a system where the employer can put money into his employees accounts, but they cannot put money in themselves, and the IRS taxes their account later as ordinary income tax. 

SIMPLE IRAs

        Then there’s the SIMPLE (Savings Incentive Match Plan for Employees) IRA, which is also intended for small businesses or self employed individuals. Same tax rules as a Traditional IRA account apply here. The difference between the SIMPLE IRA and the SEP IRA, is that in the SIMPLE IRA, the employees can also contribute to their accounts and the employer is required to  make contributions as well. All of the contributions are tax-deductible, which can push the business’s income into a lower tax-bracket. 

        Which one of these six different accounts works best for you? It depends on what you are looking for in your future. If you have plans that your account is going to grow exponentially to where you are incredibly rich in your retirement years (and how many of us don’t dream of having a wealthy retirement?), then you would want that money to have already been taxed so you don’t have even more taxes to pay. Therefore, a Roth account would be best for you.

But if you are trying to build up your savings faster and put more in at once, then a Traditional Account would be better for you so you build your portfolio up faster. Just keep in mind that you will be taxed later on, so that big number at the end isn’t completely yours. Part of it goes to the IRS. (Bleh.) 

        And of course, if you’re self-employed, you have two accounts to look into to figure out what works best for your business and for your employees. 

         I hope you found this article helpful, and I hope that it answered any questions that you might have had about the different retirement accounts. Please leave a comment and let me know what you think; I love to hear from people and I love answering any questions you might have. Have a great week!