Mastering Retirement — How to Select The Right Retirement Account

We all want to retire. Right? Retirement looks different to everyone, but whether it is sipping drinks on the beach to traveling the world, our dream retirement seems increasingly out of reach. Thankfully, we can all get the retirement we want with proper planning and using the right tools! Unfortunately, relying on social security checks isn’t guaranteed for future generations anymore, so we need to be proactive about our retirement planning. In our mastering retirement series, we will cover all things retirement, from selecting the types of account you need to investing strategies and everything else in between.

What Type of Retirement Account Is Best For Me?

There are a number of different types of retirement accounts and plans available, but it all depends on your unique situation as to what makes the most sense for your financial goals. Luckily, several different types of retirement accounts offer tax incentives for saving for the future and get us on our way to mastering retirement.

We are going to cover a few different categories of retirement plans which should give you a little more clarity on what is available to you. The two fundamental types of retirement plans we are going to focus on in this article are:

• Workplace Retirement Plans: 401(k)s, 403(b)s, 457(b)s
• IRAs: Roth, Traditional, Self, Spousal

This can get a little overwhelming, so we highly suggest talking with a financial coach or advisor to get more clarity before proceeding with any of these plans. Click here to check out our link on choosing retirement investments and the options you have available to you!

Workplace Retirement Plans:

There are two major kinds of workplace retirements plans:

1) Defined Benefit Plans:

When you hear defined benefit plans, think of a pension. The employee contributes a percentage of the salary annually to the pension, and then once they retire, they are paid a set amount monthly based on their years of service and the final salary they made before they retired. Essentially the more years you worked and the higher you were paid, the more you received monthly from your pension.

These plans are rarer today, but teachers, government officials, law enforcement officers, insurance employees, and nurses are typically among the small list of occupations that are offered pension plans.

Key Facts:

• Set monthly income received for retirement based on years worked and salary during that period of time.
• Makes budgeting for retirement very straightforward.
• You are automatically saving for retirement just by showing up to work if you enroll in the pension!
• Typically there is a minimum number of years worked to qualify to receive payouts.
• Typically does not exclude you from receiving social security in addition to a pension.
• Zero income restrictions.

2) Defined Contribution Plans:

These plans are by far the most common type of workplace retirement plans available in the marketplace. You probably have heard of a 401k in which employees contribute to their individual accounts, and money is usually taken directly from the paycheck and deposited into the 401k. A lot of companies offer a company match up to a given percentage which means they will match you dollar for dollar up to the match %. In other words, it’s free money to invest for your retirement. This free money usually takes time to be “vested,” which essentially means in order to receive the full match, you need to work at the company for a certain amount of years. Ensuring you are fully vested and taking advantage of free money sure makes mastering retirement alot easier.

401(k)

• Employees often match a portion of the money you put into your account each year.
• Typically there is a vesting schedule that requires you to work at a company for a given period of time before the money they have put in the account for you is truly yours. (Ex: 1st year 20% vested, 2nd year: 40% vested, 5th year: 100%)
• 401(k) has no income restrictions.
• Both Traditional and Roth 401(k) have annual contribution limits. ($20,500 for 2021)
• Taxes are deferred until the money comes out of the account.
• You are required to start withdrawing from your 401(k) at 70.
• Early withdrawal penalty until 59_^1/2 years old.

403(b)

If you didn’t read the 401(k) bullet points, please go back and read it because a 403(b) is almost identical except for a few minor differences.

• 403(b) plans share almost every characteristic of a 401(k) from the employee perspective.
• 401(k) is offered by for-profit companies, whereas a 403(b) is being provided by tax-exempt organizations such as nonprofits, religious organizations, schools, hospitals, etc..
• 403(b) plans offer fewer investment options than the 401(k)
• Few of these plans offer matching programs.

457(b)

• In the first three years before retirement, you can contribute double the annual limit which would be $41,000 in 2022. This is subject to limitations based on the amount you have contributed in previous years. (IRS Docs)
• You can withdraw your money as soon as you leave your job with a 457(b) without incurring any penalties.
• Few of these plans offer matching programs.
• Potentially can contribute to both a 457 and a 403(b) or 401(k) plan if the employer offers such a plan.

IRAs

The IRA (Individual Retirement Account) is one of the most common retirement plans and provide the building blocks for mastering retirement. Any individual can set up an IRA at a financial institution to hold investments for their retirement. These investments can range from mutual funds, stocks, bonds, REITs, cash, and real estate, depending on the type of IRA you select. There are many different IRAs that all offer tax benefits and reward you for saving.

The two most common IRAs are the Traditional and Roth. The key characteristics of these plans serve as the basis for the other two other IRAs we will be talking about: The spousal and self-directed IRA.

Self Directed IRA

Truly mastering retirement can be difficult when you feel limited by how and where you can invest your hard-earned money; self-directed IRAs solve this problem. Self-directed IRAs provide more flexibility to invest in different types of asset classes that have been traditionally not available to the everyday consumer. They give you greater access to how, what, and why you invest your money to meet your retirement goals. The IRS provides a list of prohibited investments in IRS publication 590. and all other investment types are allowed as long as the IRS rules are followed.

This option is not needed for everyone but can be very helpful depending on your long-term goals. If you are interested in learning more about the self-directed IRA check out this article for a more in-depth look.

Spousal IRA

It is important to note that there is no special spousal IRA account type but rather it is just a typical IRA account in the name of the non-working spouse. A Spousal IRA allows working spouses to contribute to an IRA for their non-working spouse. This provides a number of benefits such as the family to double the amount they can put into their retirement account as a family while also ensuring the other spouse is taken care of during retirement years.

When dealing with IRAs, you must have earned income in order to contribute to an IRA. The spouse IRA is the exception to the rule that allows for married individuals that file jointly to have an IRA in a name without the spouse working.

Key Facts:

• Couple must file taxes as “married filing jointly.”
• Is owned by the non-working spouse.
• Available in both traditional and roth IRA formats.
• Increased flexibility for married couple to save for retirement.

Although mastering retirement may seem impossible, there are a number of resources available to you to make your dream retirement a reality. Taking advantage of workplace retirement plans and/or IRAs will get you well on your way to ensuring a healthy and financial secure retirement.

There are a number of different IRAs available to choose from but make sure you aren’t going through this journey alone. Talk with your financial advisor to determine which plan could be right for you.

As always, you got this!