Looking to sock away more money for retirement? You’ll need to know your investment options, their pros and cons, and which one is the best for you. That’s precisely what we’ll cover in this post.

IRA plans

An IRA (individual retirement arrangement) is an account featuring various tax benefits and designed specifically to help fund your retirement. You can invest in many different assets within the account—including stocks, bonds, ETFs, and mutual funds—and while many different types of IRAs are available, traditional and Roth IRAs are the two most common options.

Traditional IRA

A traditional IRA is a “tax-deferred” account, meaning you’ll pay taxes on a future date and any contributions you make are typically funded with pre-tax dollars; earnings grow tax-deferred until you withdraw them in retirement. 

Roth IRA

Unlike the immediate tax breaks accompanying a traditional IRA, these come later with a Roth IRA—as the latter is funded with after-tax dollars, and you can enjoy tax-free withdrawals on qualified distributions in retirement.

Spousal IRA

A spousal IRA isn’t a special type of account; it’s just your typical Roth or traditional IRA that’s subject to identical contribution limits, income limits, catch-up contributions, and other rules. So, what exactly is the difference, then? As the name implies, a spousal IRA is opened by your spouse, in his or her name, and has a few associated eligibility requirements. For example, while one typically needs to have earned income to contribute to an IRA, a spousal IRA is one exception to this IRS provision as it allows a working spouse to make contributions on behalf of a marriage partner who brings in no (or very little) income.

Rollover IRA

A rollover IRA allows you to move funds from an employer-sponsored retirement account (e.g., a 401(k), 403(b), or profit-sharing plan) to an IRA. While you can roll over an IRA at any time, this most often occurs when someone changes jobs or retires.

SEP IRA

Though similar to traditional IRAs, SEP (Simplified Employee Pension Plan) IRAs are specifically designed for those who operate as a sole proprietor or business owner, are in a partnership, or earn self-employment income.

SIMPLE IRA

A SIMPLE IRA is a retirement savings plan designed specifically for small businesses and self-employed individuals. As with a 401(k), a SIMPLE IRA is a tax-deferred vehicle: meaning you fund the account with pre-tax dollars and pay taxes on any future withdrawals. SIMPLE IRAs also allow employers to make contributions on behalf of employees.

Defined contribution plans

A defined contribution plan (DC) is a retirement plan whereby employees and/or employers contribute to the employee’s individual plan account.

401(k)

A traditional 401(k) is an employer-sponsored retirement account that comprises various investments—typically stocks, bonds, and mutual funds—employees can choose from themselves or with the help of a financial advisor. Those who wish to participate can invest a percentage of their pretax income to fund their account, with the money automatically withdrawn from their paychecks. As an added benefit, most employers match employee contributions (up to a predefined percentage): essentially “free money” for the participating employee!

403(b) and 457(b)

These operate just like 401(k) plans, but 403(b) plans are offered by public schools, charities, and some religious institutions while 457(b) plans are available only to employees of state and local governments and some tax-exempt organizations.

Solo 401(k)

Also known as an “individual 401(k),” a solo 401(k) is another retirement plan option that features many of the same rules and requirements as an employer-sponsored 401(k) but is specifically designed for self-employed workers.

Annuities

An annuity is a type of insurance product that provides investors with a guaranteed stream of income. You pay money up front (via a lump sum or series of payments), which is then invested and later paid out per an agreed-upon time, amount, and timeframe.

All annuities have two components: the principal you pay into it and returns on the same. Depending on the type of annuity you establish, you can fund the account with either pre-tax (“qualified”) or post-tax (“non-qualified”) dollars. Annuity account investments can grow tax-free no matter which option you choose.

There are two basic annuity categories: immediate and deferred. While an immediate annuity provides a guaranteed income stream (often within a year) in exchange for a lump sum paid today, deferred annuities are more common and task participants with making a series of payments over a period of time to begin collecting upon retirement.

Traditional pensions

Fully funded by employers, traditional pensions provide a fixed monthly benefit to workers when they retire. Because these are less common today than they were years ago (per the U.S. Bureau of Labor Statistics, fewer than 15% percent of private industry workers had access to one in 2022), we’ll keep this section brief.

If a pension applies to you, primary considerations include when to leave your company (as your benefit is generally tied to years of service and compensation), whether or not to take a lump sum pension offer, and which pension payout options to select.

Cash value life insurance plans

A permanent life insurance policy is one way to supplement your retirement savings, with these policies typically allowing you to build or “accrue” cash value (funded by a portion of your premiums) in addition to your death benefit. Think of a cash value insurance policy as an investment-like savings account that includes a death benefit.

In sum: the most common retirement plan choices

It’s important to know your options when looking to save for your future. This post hopefully did just that, arming you with a high-level understanding of the most common retirement plan types investors rely on to accumulate wealth.

Still trying to decide which retirement account options are right for you?  Schedule a FREE Discovery call with one of our CFP® professionals.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.

Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59½ are subject to a 10% IRS penalty tax, and surrender charges may apply. Variable annuities are subject to market risk and may lose value. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges, and restrictions, and the policyholder should review his or her contract carefully before purchasing. All guarantees are based on the claims-paying ability of the issuing insurance company.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. It may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation, or activities that may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice, you should consult an insurance professional. You may also visit your state’s insurance department for more information.