To help you narrow down the best retirement plans for you, it’s important to first look at the advantages and disadvantages of each type of plan.
Published February 22nd, 2021
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There are five major types of retirement plans for employees in the private sector.
Some retirement plans, like 401(k)s and defined benefit plans, are sponsored by employers.
Individual retirement accounts and Solo 401(k)s can be set up by a broker or lender.
There’s no shortage of options when it comes to retirement accounts. You can set up a 401(k) or IRA, either in traditional or Roth form. You can invest through your employer or on your own, and you can spread your money across some or all of these options.
To help you narrow down the best retirement plans for you, it’s important to first look at the advantages and disadvantages of each type of plan. We’ll go through five major types of retirement plans: IRAs, 401(k)s, employee-sponsored plans, small business plans, and self-employed plans.
What Retirement Plan is Best for You?
If you aren’t already saving for retirement, it's time to start now. But having so many options can feel overwhelming. If your employer offers a 401(k) retirement plan or pension, those may already have been set up for you. But you can always contribute more money. It’s important to map out your own goals, determine what you can afford, and look at the pros and cons of each type of retirement plan before deciding.
Types of Retirement Plans
When looking at types of retirement accounts, it’s important to first weigh all the options available to you. If you work for an employer, you may get a better deal than if you sign up for things individually, especially if your employer matches your contributions.
But there are also individual retirement options that you can seek out. You’ll need to go through retirement companies or apps that specialize in connecting you with those options, but there are plenty of choices. Here’s what you need to know about the five different types of investments.
Even the best 401(k) plans can struggle to compete with individual retirement accounts on a couple of levels. But in some cases, 401(k)s are a better option. Here’s what you need to know about IRAs.
Advantages & Disadvantages
The biggest thing that makes Traditional and Roth IRAs the best types of retirement plans is that they grow tax-deferred. That means any income you earn on the money isn’t taxed. Also, IRAs offer an open buffet table of investment options while you might limited in your investment selections through an employer-based plan.
But one reason the IRA (either Traditional or Roth) might not be one of the best investments for retirement is the contribution limit. You’re limited to only $6,000 per year, if you’re under age 50, or $7,000 if you’re older. That limit changes from one year to the next, but it’s always significantly lower than other investment options.
Types of IRAs
Before you choose an IRA as your retirement savings plan, here are the two types to consider: Roth IRA – With this type of IRA, you invest money that you’ve already paid taxes on today. In return, that means at retirement you enjoy tax-free withdrawals, and that includes any investment gains that you earned. Traditional IRA – A Traditional IRA operates similarly to a Traditional 401(k). Your contributions are tax-deductible which helpfully lowers your taxable income in your working years, but at retirement, you’ll owe taxes on any money you take out.
401(k)s & Other Employer Sponsored Plans
The 401(k) is now the most prevalent employer-based retirement account. Your employer handles withdrawing the funds from each paycheck and your savings grows without you having to do a thing. Bonus points if they match your contributions as this is free money for your futured retired self.
If your employer matches, it’s important to take full advantage of that match. Once you’ve maxed that out, you can start considering other savings options. But there are other employer-provided options that can serve as the best retirement accounts. Here’s what you need to know about each.
Advantages & Disadvantages
You don’t have to look around for the best 401(k) companies. Simply ask your employer if it’s offered. The money you put into a 401(k) will be taken out pre-tax, so that’s what makes it one of the best retirement funds. You won’t owe taxes until you take the money out at retirement. But going through your employer can be a disadvantage because if you change jobs, your contributions will stop and you’ll have to remember the fund exists when you retire or rollover the account to an IRA.
Types of Employer Sponsored Retirement Plans
There are multiple types of employer-sponsored retirement plans. They include:
- Pensions – In today’s environment, this is becoming a less frequent retirement savings option. Your employer puts money toward your retirement with no requirements on your end beyond continuing your employment.
- 401(k) – Employers may offer either a traditional and/or Roth 401(k), With a traditional 401(k), the money is contributed before taxes are taken out of your paycheck. Roth 401(k)s take the money after you’ve paid taxes.
- Restricted stock and stock option plans – Some employers give you the opportunity to invest in the company itself, which can be a great way to put money toward retirement.
Small Business & Self Employed Plans
An increasing number of Americans are choosing self-employment over working for an employer. For that reason, you can easily find lenders, individual brokers, and retirement plan companies that will connect you with IRAs
Advantages & Disadvantages
The biggest advantage to a self-employed retirement account is that you’re in charge. You can weigh all your options and choose the best. But you’ll lose the benefit of having an employer put some money into that account. There’s no guarantee that you’ll have that benefit if you do opt to work for an employer, though.
Types of Self Employed Retirement Plans
There are multiple retirement fund options for self-employed professionals. Here are some to consider:
- Traditional or Roth IRA – Individual retirement accounts are custom-made for self-employed professionals. Look at the pros and cons of Roth versus Traditional and choose the one that fits your goals.
- Solo 401(k) – You no longer have to rely on an employer to set up a 401(k) plan.
- SEP IRA – If you run a small business with a couple of employees, a SEP plan will let you make tax-deferred contributions to your employees’ funds.
- Simple IRA – As your small business grows, a Simple IRA could give you greater flexibility as you contribute to employee retirement accounts. Simple IRA accounts have higher annual contribution limits than traditional IRAs ($13,500 in 2021 and an additional $3,000 catch-up contribution allowed for employees over 50).
With so many options, it’s never been easier to customize your retirement savings to fit your own unique needs. A Certified Financial Planner® can help you choose the right account for you, whether it’s an IRA, 401(k), or other investment option.
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Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.
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