Which Retirement Accounts Are Right for You

Unbiased Financial Information Provided by Financial Finesse

For better or worse, retirement savings accounts don't come "one-size-fits-all." On the bright side, different eligibility requirements, tax treatment and contribution limits means the odds are pretty good that at least one account has everything you need and want. On the other hand, narrowing your choices down requires knowing something about all your options.

Your Company Plan Offers Convenience, an Immediate Tax Break...and Maybe Free Money!

A 401(k), 403(b) or similar plan might be the single most effective way to fund your dream retirement.

  • In 2009, you can contribute up to $16,500 (with an additional $5,500 "catch-up" contribution allowed for workers age 50 and older). Since your contributions are made with pre-tax dollars, you could cut your final tax bill for the year by hundreds or thousands of dollars!
  • If your employer matches contributions, the decision to participate is an easy one. Consider matching dollars a bonus you get every pay period. Try to contribute at least as much to your employer-sponsored retirement plan as you need to in order to get the maximum employer match.
  • Your money continues to grow sheltered from taxes until you withdraw funds. Distributions will be taxed at your income tax rate.
  • You'll have several investment options to choose from.

Early withdrawal penalties generally apply if you withdraw money before age 59 1/2, unless you meet certain exceptions described under "Tax on Early Retirement" in IRS Publication 575, Pension and Annuity Income.

IRAs Offer Tax Benefits Whether You Have an Employer-Sponsored Plan or Not

An Individual Retirement Account (IRA) is a non-employer sponsored savings option. There are two main types of IRAs -- the traditional and the Roth -- with a couple of major differences between them.

  • Traditional IRA. Contributions may be deductible if you qualify (based on income and the availability of a retirement plan through work). Account assets grow tax-deferred until they are withdrawn. Distributions are mandatory after age 70 1/2.
  • Roth IRA. Contributions are not deductible, but qualified withdrawals are tax-free. (That's a huge difference between the traditional and Roth IRAs!) Also, there are no mandatory distributions.

Eligibility for the Traditional IRA depends largely on two variables: whether you have access to an employer-sponsored retirement plan and whether your modified adjusted gross income (MAGI) is below certain limits. Eligibility for the Roth IRA is based solely on your MAGI.

The contribution limits are the same for both IRAs. In 2009, savers can sock away up to $5,000. Investors 50 years old or older can deposit an additional $1,000 a year as part of a special "catch-up" provision. The same penalties for early withdrawal that apply to employer-sponsored plans apply to IRA withdrawals that don't meet any of the IRS exceptions -- taxation at your current income tax rate and a 10 percent penalty on the amount withdrawn.

Depending on your situation, choosing between the traditional IRA and the Roth can be as easy as pie -- or it can require some tough calculations. For more information about IRAs, take a look at IRS Publication 590.

Small Businesses Can Provide Plans That Fund Retirement Dreams of Owners and Employees

Just because you're self-employed or run a small business doesn't mean you can't prepare for your retirement or help your employees prepare for theirs.

  • SEP plans. Small businesses and the self-employed can use a SEP plan. Only the employer may contribute, and the contributions are deductible as a business expense. Contribution limits are much higher than under a 401(k) or 403(b) plan -- as much as 25 percent of compensation or $49,000 (whichever is less) in 2009 -- and SEPs are generally easier and less expensive to administer.
  • Keogh plans. Like the SEP plan, Keoghs are designed for small businesses and the self-employed. And, like SEPs, the maximum contributions are also higher than those allowed under a 401(k) or 403(b) plan, as much as 100 percent of compensation or $49,000 (whichever is less) in 2009. But Keoghs are generally more expensive to administer (still cheaper than a 401(k), though) and are subject to more IRS reporting requirements.
  • SIMPLE plans. The savings incentive match plan for employees allows an employer with fewer than 100 employees to offer a retirement account that allows for employee salary deferral of up to $11,500 in addition to employer contributions.
  • Solo 401(k). For self-employed business owners, the Solo 401(k) combines the benefits of two plan types: the SEP IRA and the 401(k). Like a SEP IRA, contributions are made by the employer and administration and setup are easy. Like a 401(k), contributions are made by the employee and plan loans may be available. The total combined contributions may not exceed $49,000 in 2009 ($54,500 for age 50 and older), but this plan type may allow for greater tax deductible contributions than other plans at the same income level.

More Retirement Savings Vehicles for Motivated Savers

  • Variable universal life insurance. A VUL policy combines life insurance and an investment account. The policyholder pays premiums (in excess of the term insurance cost of the policy) that are collected in a cash value account and can be invested in fixed and variable sub-accounts (similar to mutual funds). The growth is sheltered from taxes and can be accessed through withdrawals (which may be subject to surrender charges) or loans (subject to interest and other charges for borrowing from your policy's cash value) as needed.
  • Variable annuity. The money invested in an annuity grows sheltered from taxes and may provide a death benefit to your heirs. Account holders have the option to convert their assets to a stream of payments (another source of retirement income) that they can't outlive. This is referred to as annuitizing the contract.

With all the choices on the retirement plan "menu," nobody should walk away hungry. Choose one option or a combination to fund your retirement dreams.


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