Which Type of Retirement Account is Best for You?

retirement planning with spouse

When choosing a retirement account, all the available options can make choosing a retirement account a daunting task. That is when we come in. At Trust Company of Oklahoma, we understand that there is a lot at stake, and we want to help you choose the right retirement account for you. Having our help could mean the difference between tax-free withdrawals or having to pay every time you need the use of your nest egg.

How can we tell what retirement account is right for you? Let’s find out!

Employer-Sponsored Retirement Accounts

If you are like most working Americans, you probably have some form of retirement fund available to you through your workplace. Those options are typically as follows:

  • 401(K)

A 401(K) is the most common retirement account that companies offer their employees. There are two primary forms of 401(k)s, traditional and Roth, with the difference being how each account is taxed.

    • Traditional 401(K)

These retirement plans are funded with pre-tax dollars, and the money that is put into these accounts grows on a tax-deferred basis. What that means is that you will not pay taxes on the funds now, but you will be taxed on any withdrawals you take out in retirement.

    • Roth 401(k)

When you place money in a Roth 401(K), your money grows tax-free, and you will not pay any taxes when it comes time to take your money out in retirement. However, we should note that only the contributions that YOU MAKE to this account are tax-free. Should your employer choose to add money to your account, that money will grow tax-deferred, so you’ll have to pay taxes on the matching side of the account when you go to withdraw your funds.

As of 2020, you can put up to $19,500 each year into a 401(k), but if you are 50 years old or older, you can add up to $26,000 to your account annually. You should know about 401(k)s because you cannot withdraw money from this account until you reach 59 ½. If you decide to drawl before then, you will get a rather large penalty tacked by the IRS.

  • 403(b)

A 403(b) is for individuals who work for a non-profit or tax-exempt organization. A 401(k) and 403(b) work in the same way in that they have contribution limits and early with drawl penalties. They can also be both traditional or Roth. The main difference between a 401(k) and a 403(b) you should know about is that with a 403(b), the investment options are often loaded with insurance products that have low returns and expensive fees. If you choose a 403(b)-retirement account, we suggest sticking with good growth stock mutual funds.

  • Thrift Savings Plan (TSP)

Thrift savings plans give federal workers and members of the military the ability to invest in a tax-advantaged account for retirement. There are five different fund options for you to choose from: The Government Securities Investment (G) Fund, The Fixed Income Index Investment (F) Fund, The Common Stock Index Investment Fund, The Small Capitalization Stock Index (S) Fund, and the International Stock Index Investment (I) Fund.

  • Pension Plans

Pension Plans are sometimes referred to as defined benefit plans and use a formula based on your salary history and employment length to calculate a guaranteed retirement payment. In this day and age, pension plans are no longer a common form of retirement account, which is good because they are not always a safe bet. We have watched companies struggle financially throughout the years and have to scale back on pensions because they have mismanaged their money, leaving you less in retirement.

Do-it-Yourself Retirement Accounts

Now that we have explained workplace retirement accounts let’s dive outside the workplace and discuss retirement accounts that you are able to set up on your own with the help of an investment professional.

  • Individual Retirement Arrangement (IRA)

IRAs or Individual Retirement Arrangements are retirement savings accounts that help you save for retirement outside of a workplace while boosting tax advantages as a benefit. Individual Retirement Arrangements allow you to choose almost any investment inside your IRA, including mutual funds, annuities, or even real estate. There are two main types of IRAs, Traditional IRAs and Roth IRAs. Let’s break those down to see which one could be best for you!

    • Traditional IRAs

When you opt for a traditional IRA, you invest in pre-tax contributions. What that means for you is that you are able to claim your contributions as a tax deduction now, but you will have to pay taxes on the money you withdraw in retirement later. One of the best aspects of choosing a traditional IRA to help you save for retirement is that there are no income limits on contributions. What that means for you is that you can put your money into an IRA no matter how much you make.

    • Roth IRAs

When you contribute to Roth IRAs, you invest in after-tax dollars, meaning that the money you place in this retirement account grows tax-free, and you will not be faced with taxes when you withdraw money from the account either. Unfortunately, there are income limits for Roth IRAs. For 2020, those income limits are $196,000 for married couples filing jointly or $124,000 for single people.

  • Taxable Investment Accounts

Taxable Investment Accounts require no income limits, and you have the ability to withdraw money at any time without getting slammed with penalties. Because of these benefits, taxable investment accounts are a great option for individuals who hope to retire early.

Though these benefits sound too good to be true, there is a drawback we want you to know about taxable investment accounts, and that is you have to pay taxes on any money your account earns. This fact alone is why at Trust Company of Oklahoma, we recommend only choosing a taxable investment account after you have maxed out other tax-advantage options.

Retirement Accounts for Small Businesses or the Self-Employed

There are so many Americans working for themselves in this day and age, and they may not have the resources for a full 401(k) plan just yet. But you don’t have to have access to a 401(k) to save for retirement. Let’s dive deeper into your options.

  • One-Participant 401(K)

A one-participant 401(k) was designed for a business owner who has no employees. This retirement account option allows you to contribute up to $19,500 every year, and the contributions are tax-deductible. On top of being able to put that amount of money into your account, you can put an additional “employer match” contribution of up to 25% of your income as long as your total contributions are less than $57,000 per year.

  • Simple IRA

A simple IRA is a perfect solution once you hire employees to help take your business to the next level. As of 2020, employees can save up to $13,500 into the plan while the employer is required to offer up to a 3% match for their employees on a yearly basis.

  • Simplified Employee Pension (SEP-IRA)

This retirement account only allows employers to contribute up to 25% of an employee’s salary to their account each year, totaling up to $57,000 in contributions.

Which account is best for you?

Choosing the right retirement account is a huge step that will get your retirement dreams closer to reality. At Trust Company, we want you to know that you do not have to make these decisions on your own. Our retirement experts want to help you plan for the unexpected so that you avoid the risk of depleting your life savings. Connect with us to get started!