Types of Retirement Accounts Explained

Even if retirement seems far away, it's never too early to research the different types of retirement accounts available to you.

Prepare for future retirement today by researching different types of retirement accounts so you can make the best choice for you. Retirement requires a lot of planning ahead so that you have enough money put away to take care of all your needs during your retirement years.

There are many things to think about when planning for retirement, but getting your different types of retirement accounts set up is definitely one of the first things you should do.

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401k Retirement Accounts

401k retirement accounts pros and cons chart

A 401k is the type of retirement savings account that is set up through your employment. It comes with a lot of perks because of this. In general, this type of retirement account will let you make higher contributions than an IRA each year. People who are younger than 50 years old can put up to $19,500 into their 401k account each year, but you can only put up to $6,000 into an IRA account each year.

Another reason to use a 401k if your employer offers one, is that many employers will match a portion of your 401k contributions. For example, if your company matches 100% of your contributions, then if you put $100 into your account each month, your company will also put $100 into your account each month. 

Availability for this type of retirement account just depends on whether your work provides it or not. The benefits of the account also depends on your company and how they set the account up. Each company is different, so sit down and look over your company’s retirement 401k and what all it includes. 

Solo 401k

The main difference between a traditional 401k and a solo 401k is that a solo 401k is offered to individual business owners with no employees.

A solo 401k can also sometimes be called a one-participant 401k because only one person is included on this account. But this account isn't for any individuals, it’s specifically for an individual business owner that doesn’t have workers. So if you’re self-employed or own and operate your own business, you could create a 401k account for yourself. This is a way for self-employed people to still get a 401k even though they are the employee and employer. 

403(b)

The main difference between a traditional 401k and a 403(b) account is that a 403(b) is offered to employees of nonprofit organizations. 

Nonprofit organizations function a little differently than traditional companies. Creating a “401k” account specifically for nonprofit organizations helps the workers of these organizations have some kind of employer-provided retirement account as well. 

457(b)

The main difference between a traditional 401k and a 457(b) is that a 457(b) is offered to state or local government employees. 

Much like workers of nonprofit organizations, employees in the private sector don’t work for traditional companies. Having a type of 401k account for public sector employees helps these types of employees not miss out on an employer-provided retirement account. You could also qualify for this account if you work for a tax exempt organization.

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IRA Retirement Accounts

IRA retirement account pros and cons charts

A traditional IRA retirement account is different from a traditional 401k account because it isn’t offered by employers. Instead, you can set up an IRA account with a financial institution like you’re bank. In a way, an IRA is like a personal retirement account and a 401k is like a work retirement account. Even if you have a 401k account, getting yourself an IRA account is still a great idea because if you ever move jobs, you can move your work retirement account funds into your personal retirement account.

Roth IRA

The main difference between a traditional IRA and a Roth IRA is that the contributions to a Roth IRA are not tax deductible so that the withdrawals can by subject to no income tax. 

Most retirement accounts are set up so that contributions are free from tax, but then the withdrawals are subject to income tax. The Roth IRA is the type of retirement account that instead takes out taxes as you contribute so that the withdrawals can be free from income tax. Another perk of the Roth IRA is that you also don't have to start taking out withdrawals at a certain age like most other retirement accounts. 

Self-Directed IRA

A self-directed IRA is a lot like a traditional IRA with the same contribution limits and qualifications. But, a self-directed IRA has different rules about the investments you can make and include in the account. You can invest your self-directed IRA funds into alternative assets like crypto, precious metals, real estate, etc. This can be a huge perk because investments can potentially help your retirement account grow exponentially.

SIMPLE IRA

The word simple in a SIMPLE IRA is actually an acronym for Savings Incentive Match Plan for Employees. This is a retirement plan for employees of small businesses. A small business is comprised of 100 or less employees. An employee of a qualifying small business earns at least $5,000 in the past 2 years and at least $5,000 in this year. Your employer is also required to make contributions to your SIMPLE IRA account. 

SEP IRA

The letters SEP in SEP IRA is an acronym that stands for Simplified Employee Pension. It is a retirement account for small business owners. This type of account includes the small business owner and any of their employees. 

HAS

The letters HAS in HAS retirement account, stands for Health Savings Account. This is a different kind of retirement account in that it isn’t for any kind of expenses in retirement. Instead, an HAS account is designed specifically for health and medical expenses in retirement. Now you can keep your medical savings for retirement separate from the rest of your retirement savings. 

For an individual account holder you can contribute up to $3,600 into your HAS. As a family account holder you can contribute up to $7,200 into your HAS.

HAS contributions are tax deductible. HAS withdrawals are also tax deductible, so long as the HAS funds are used for qualifying expenses like health and medical expenses.

In Conclusion,

There are interesting pros and cons to all types of retirement accounts. A 401k is great because it often comes with employer contribution matching and it has higher contribution limits per year than an IRA. But an IRA is great to have in case you ever have an employer that doesn't provide a 401k. A Roth IRA is even better, because you can avoid having to pay income taxes on your withdrawals from that account in retirement.