All the Different Retirement Accounts You Can Use

Saving for retirement is an important part of every person’s financial planning. Previously, I recommended dividing your money into multiple accounts so you can see all of your savings goals separately. A big part of this is using retirement accounts to invest for your future. So how can different types of accounts help you achieve your retirement goals? Here’s a basic overview of the main retirement accounts you should have based on your employment situation, income and retirement goals.

401(k)

A 401(k) is an employer-sponsored retirement account that allows you to contribute pre-tax dollars from each paycheck toward retirement. With a 401(k), the money you save isn’t just saved, it’s invested. You have the option of investing in various assets such as stocks, bonds and mutual funds. Your funds are held tax-free until you withdraw them, ideally after years of growth.

Many employers will match your contributions up to a certain percentage. Money grows tax deferred until you start withdrawing it in retirement. Take advantage of all the benefits any employer offers – it’s free money for retirement.

If your workplace has a 401(k) , you may hear a common belief: contribute 10% to 20% of your salary. However, it might be smarter to contribute to this match first, then max out the Roth IRA, and then return to the 401(k) to reach your overall retirement savings goal. I’ll explain more below, but first let’s take a look at the IRA.

Traditional and Roth IRAs

An individual retirement account (IRA) is a personal retirement account that you open on your own. There are two main types of IRAs: traditional and Roth. Simply put, with a Roth IRA, you pay taxes on your savings right now. With a traditional IRA, you pay taxes later. We’ve written about the differences in more detail here and generally favor Roth over traditional.

IRAs have lower contribution limits than 401(k)s but are still excellent supplemental retirement savings. There is no limit to the number of traditional individual retirement accounts, or IRAs, you can open. However, if you set up multiple IRAs, you won’t be able to contribute more than the contribution limit across all of your accounts in a given year. The annual contribution limit for a Roth IRA in 2023 is $6,500 if you are under 50 and $7,500 if you are 50 or older . You can and should exceed these limits as much as possible if possible.

Now let’s get back to how 401(k)s and IRAs work. When you withdraw money from your 401k, you’ll have to pay taxes on the growth, which should hopefully be significant, especially if you started investing when you were in your early 20s. But with a Roth IRA, you won’t be taxed on the growth later because you were already taxed on that money before you stashed it. This means it’s smart to make the most of your Roth tax-free growth and always prioritize making the most of it. Then allocate any remaining funds needed to your 401(k) to reach your overall retirement savings goal of 10-20% of your income.

Other types of IRAs

There are also SEP IRAs for self-employed or small business owners who provide their own retirement benefits. They have higher contribution limits than traditional IRAs and Roth IRAs, but all contributions are made by the employer, not employees. Likewise, the SIMPLE IRA (Savings Incentive Plan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees.

If you or your spouse do not earn taxable income, one of you may consider creating a spousal IRA . That way, you won’t have to miss out on tax-deferred growth and retirement assets in your name just because you’re not in the traditional workforce.

HSA

If you have a high-deductible health insurance plan, you can open a health savings account (HSA). This allows you to make pre-tax contributions that you can use to cover certain medical expenses. Any money not used for medical expenses can be invested and is tax-free. HSAs have become a popular vehicle for retirement savings.

Annuities

Annuities are insurance contracts that provide guaranteed income for life after retirement. You pay a lump sum or a series of payments to the insurance company and begin receiving fixed payments in the future. There are different types of annuities with different pros and cons. They can provide income that you may not be able to survive; but they also require high upfront costs and you have limited access to your funds.

Bottom line

With the right retirement accounts, you can grow your savings and prepare for your post-work years. The key is to start saving as early as possible ( rules of compounding !) and use a combination of these accounts to build your retirement funds. Here are our guides to opening an IRA and opening a 401(k) . Beyond retirement savings, here’s my guide to the different types of savings vehicles you might need.