As always, there are many options for retirement plans. What are the best types of retirement plans available in 2021?
Of course, the best retirement plan depends on your individual situation. If you have taxable income or work for an employer, you probably qualify for multiple retirement savings accounts. Even if you are self-employed or do not work, you still have options. While most retirement accounts are set up through employers, you can also open and manage your own individual retirement accounts.
The four primary types of individual retirement plans are:
- Traditional IRAs
- Roth IRAs
- Spousal IRAs
- Rollover IRAs
As far as retirement plans through your employer, there are also various types.
Your typical options are:
- 401(k) plans: traditional or Roth, typically offered by for-profit employers
- 403(b) plans: available to most non-profit employees
- 457(b) plans: reserved for government employees
- Thrift savings plans: reserved for government employees
The best thing about independent retirement plans like IRAs is that you can open one as long as you have taxable (earned) income. Even if you have an existing employer-sponsored retirement account, you can usually supplement that with your own traditional IRA, Roth IRA, or other independent retirement accounts.
Traditional vs. Roth IRAs
Many people ask what the difference between a traditional IRA and a Roth IRA is. Traditional IRAs let you save with pre-tax contributions. Roth IRAs allow you to contribute after-tax dollars toward your retirement savings. As long as you’re eligible, financial experts generally recommend Roth IRAs for early-career workers who expect to be at a higher tax bracket in the future when they’re making withdrawals. Experts recommend traditional IRAs for higher-income workers who could use a tax deduction right now.
The biggest difference between the two comes down to tax advantages and income limitations. For example, the Roth IRA limits who can contribute and how much. For Roth IRAs, single filers can only contribute the maximum amount in 2021 as long as their modified adjusted gross income (MAGI) is less than $140,000.
Married couples need to earn less than $208,000 a year to contribute the full amount in 2021.
How Do I Choose the Best Retirement Plan for Me?
Choosing the best retirement plan usually depends on your type of employer, marital status, and short- and long-term savings goals. As an employee, you’ll only have so much control since your employer determines which types of plans you can open.
However, for most employer-sponsored retirement accounts, you can still decide whether or not to make pre-tax or post-tax (Roth) contributions to your account. As in IRAs, Roth (post-tax) contributions to an employer-sponsored plan like a 401(k) are best for those who expect to pay more in taxes as they age, but you should consider pre-tax contributions if you need more deduction on your earnings and you don’t mind paying taxes when you withdraw money from your account in retirement.