IRAs and 401(k)s are the most popular retirement accounts when it comes to retirement planning. Both are easy to manage and can lead to sizable savings if you start early and contribute regularly. However, a 401(k) or Roth IRA will not always meet everyone’s retirement needs.
One of the best things you can do to meet your retirement goals is to review your options and consider the types of retirement plans available. Doing so will help you identify the best path forward and the ideal retirement plan for your specific goals.
To help you get started, we’ve compiled a list of ten types of retirement plans worth considering.
1. Traditional IRA
Traditional individual retirement accounts (IRAs) are one of the most common retirement vehicles available. According to the most recent data from the Investment Company Institute, nearly 29% of households that hold an IRA account have a traditional IRA.
Traditional IRAs allow investors to contribute pre-tax dollars to their investment account, which is held and managed by a trustee or custodian. While in the account, funds grow tax-deferred until they are withdrawn. Funds can be invested in common investment vehicles, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs). Taxes are applied upon withdrawal and based on the account holder’s current income tax rate.
- Annual contribution limit of $6,000 annually or, if 50 years or older, $7,000 annually.
- Withdrawals used before the age of 59 ½, also known as “early withdrawals,” are subject to a 10% penalty in addition to income tax.
- Account holders 72 or older must take the required minimum distributions (withdrawals) each year.
- Modified adjusted gross income does not affect contribution limits.
- A federal penalty is applied to all early withdrawals.
2. Roth IRA
Roth IRAs are the second most popular type of retirement plan held by households in the U.S. Unlike traditional IRA contributions, Roth IRA contributions are taxed upfront. Withdrawals are not subject to income taxes. Instead, taxes are based on the account holder’s current income tax bracket.
For this reason, Roth IRAs are ideal for individuals who anticipate being in a higher tax bracket around retirement.
Like a traditional IRA, a Roth IRA is held by a custodian or trustee, and you can invest in stocks, bonds, mutual funds, ETFs, and REITs.
- Annual contribution limit of $6,000 annually, or, if 50 years or older, $7,000 annually.
- No required minimum distributions
- No contribution age restrictions
- Contribution limits may be reduced based on your modified adjusted gross income.
- Early withdrawals of contributions are not penalized, though there is a penalty for earning withdrawals.
3. Self-Directed IRA (SDIRA)
A self-directed IRA is a retirement account that gives account holders direct control of their investments. Individuals retain complete control of their investment decisions, though a custodian is still required to open an account.
One of the most common reasons people open self-directed IRAs is to leverage investment opportunities unavailable using standard IRAs. Some of these investments can be high-return passive income ideas, making an SDIRA very attractive to savvy investors. These investment opportunities include:
- real estate
- promissory notes
- precious metals
- Available in several forms, including traditional, ROTH, SEP, and SIMPLE.
- Rules and regulations are based on the type of IRA selected.
- Earnings from an SDIRA must go directly back to the SDIRA account.
- Account holders must perform their own due diligence when making investment decisions. The custodian or trustee does make decisions regarding investments.
4. SEP IRA
A simplified employee pension plan or SEP IRA is a retirement account that allows self-employed individuals and small businesses to leverage the tax benefits of a retirement account. Business owners who choose to offer SEP IRAs contribute to the accounts directly.
These retirement accounts are often easy to administer and have low fees. This makes it a feasible option for business owners who can’t or would prefer not to offer 401ks but still want to offer a retirement benefit. And, because contributions are flexible, SEP IRAs can accommodate businesses that have fluctuating revenue cycles.
- Only employers can contribute to the account.
- Annual contributions are limited to 25% of the employee’s compensation or $61,000 (as of 2022).
- Contributions must be made equally for qualified workers.
- Withdrawals are subject to a 10% income tax if made before age 59 ½.
- Business owners can deduct the lesser of 25% of compensation or your contributions.
Common among public employees, pensions are employer-sponsored retirement plans that offer monthly benefits that are earned upon retirement and up to your death. The amount of money you receive from a pension fund often depends on your salary and how long you worked for the issuing company.
- Pension participants can start receiving their payout at the age of 62, even if they are still employed.
- Pension funds are typically taxable as long as the account holder didn’t contribute, if the employer didn’t withhold after-tax contributions from the employee’s pay.
- Pension funds may be partially taxable if the employee contributes after-tax dollars.
- Distributions taken before the age of 59 ½ may be subject to a 10% tax penalty.
- Some pension plans allow employees to make contributions.
6. Solo 401(k) Plan
A 401(k) individual or solo 401(k) plan are single-participant plans designed for self-employed individuals who want to leverage the tax and investment benefits of a traditional 401(k). These plans are also commonly referred to as one-participant 401(k)s.
- Account holders can contribute elective deferrals up to 100% of their income, as well as nonelective employer contributions.
- Total contributions are limited to $61,000 (as of 2022).
- Required distributions typically begin at 72.
- 401(k) funds can be rolled into other retirement accounts, including SDIRAs.
7. Guaranteed Income Annuities
Guaranteed income annuities (GIAs) allow a retirement account holder to convert some of their existing retirement savings into a lifelong, regular income stream. These plans prevent you from outliving your savings or supplementing other retirement income.
There are multiple guaranteed income annuity products, and the details, restrictions, and qualifications will depend on the product you choose and the funds you use to purchase it.
- GIA premiums can be paid all at once or over time.
- Account holders can typically select their payment structure: monthly, quarterly, semiannually, or annually.
- Unlike many other retirement accounts, GIAs are not vulnerable to market fluctuations.
- Account holders can choose when they receive their annuity payments, meaning they aren’t subject to distribution age requirements.
8. The Federal Thrift Savings Plan
A Federal Thrift Savings Plan (TSP) is a defined contribution retirement plan that offers tax-deferred benefits. It is part of a three-fold retirement package offered to federal employees and operates similarly to a 401(k).
- Eligible federal government employees are automatically enrolled.
- As of 2020, new TSP participants will automatically contribute 5% of their salary to their TSP account. Employees hired before 2020 but after 2010 have a 3% automatic contribution.
- Annual contributions are limited to $20,500 as of 2022, and account holders 50 years or older can contribute an additional $6,500.
- The federal government matches TSP contributions using a sliding scale.
- Required distributions start at age 72.
9. Cash-Balance Pension Plans
Cash balance plans are qualified retirement plans that operate on a defined benefit basis with an annuity component. Cash balance plan accounts grow through an employer contribution and an interest credit. Interest credits are guaranteed and not subject to market performance.
- Benefits are based on the account balance when the employee qualifies for distributions.
- Investment risks are placed solely on the employer.
- Participants can choose to take their benefit as a lifetime annuities payment.
- Contribution limit increases with age.
- Interest credit rates are based on the 30-year Treasury bond yields.
10. Cash-value Life Insurance Plans
Cash-value life insurance plans are permanent life insurance policies that accumulate cash value over time. When you purchase one of these plans, your premium is split three ways. A portion of it goes to the death benefit (the payment your beneficiary receives), another part goes to the cost to the insurer, and the final portion goes towards the cash value.
How your cash value grows depends on the type of life insurance policy you choose. Options include whole life insurance, universal life insurance, variable life insurance, and indexed universal life insurance.
Though these policies provide some room for investment growth, their primary purpose is to provide a death benefit to beneficiaries.
- Account holders can borrow against or withdraw from their account cash balance.
- Some policies, like whole life, offer guaranteed cash value growth, while others, like universal life insurance policies, base cash growth on market performance.
- Policy premiums are based on the insured’s age, health, medical history, and nicotine use, among other things.
- Some policies, like universal life insurance, allow for flexible premiums and death benefits.
- As a life insurance policy, the insured can name one or more beneficiaries to receive the death benefit and cash value.
Which Retirement Account Is Right for You?
Finding the right type of retirement plan depends on your financial needs, investment goals, and the amount of control you want over your account.
For instance, self-directed IRAs are often a great option for individuals who want to invest in assets outside the traditional investment portfolio, including compound interest investments.
On the other hand, a traditional or Roth IRA is ideal for people looking for a passive investment account.
Depending on your financial and professional circumstances, you may also find that a combination of accounts can help you meet your long-term goals.
Horizon Trust can help you find the right path to retirement, especially if you want to expand your portfolio to include alternative assets. Contact us today to learn more about your retirement options and which types of retirement plans may be best suited for your needs.