Which retirement savings plan is right for me?

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Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

If you’ve arrived at this page and are making concrete plans to save for retirement, you’re already in better shape than most of your peers. But which retirement account or accounts is best for you?

What the major retirement savings plans all offer is major tax advantages for those who contribute. 401ks, Traditional IRAs and SEP IRAs are all called tax-deferred accounts, meaning that the government won’t tax any money you deposit in the account up to the yearly maximum contribution — so if you make $60,000 and contribute $5,000, the government will only tax you on $55,000 of income. (The IRS will, however, tax the money after you withdraw it during retirement.)

401ks are employer administered plans, meaning that if you work a full time job for a big company, chances are they’ll offer a 401k, which has one major advantage over all other plans: employers will often match some percentage of your annual contribution. The downside of 401ks is that since your employer runs it, you have limited options on how your money will be invested.

Traditional IRAs work much the same as 401ks, but since you open them on your own, you’re free to invest your retirement savings however you like. SEP, or Simplified Employee Pensions, are specifically designed as a 401k alternative for those who are self employed. They have a much higher contribution limit than any other retirement plan — for the 2019 tax year you can contribute a full 25% of your income or $56,000, whichever is less. The limit for the 2020 tax year will be 25% of your income or $57,000, whichever is less.

Roth IRAs are designed differently than any of the other plans in that any contributions you make out of you income are taxable now—but any gains you make between now and your retirement won’t be taxed upon withdrawal. They have relatively low contribution limits—for the 2019 tax year, you cannot contribute more than $6,000 ($7,000 if you're age 50 or older) or your taxable compensation for the year (whichever is less). The contribution limits for the 2020 tax year will be the same as 2019. If you are a big earner, Roth IRAs will likely not even be available to you; any single tax filer who earns more than $122,000 is not eligible to open a Roth IRA. For 2020 the income limit will be $124,000.

Last Updated March 9, 2020

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