Whether you’re just starting out or looking for ways to expand your current retirement savings efforts, it’s important to familiarize yourself with the variety of savings options available to build a nest egg. Here are some of the top retirement vehicles to keep in mind as you work to increase your savings, many of which are well-known and a few that may be new to you.
While savings accounts are perhaps the most simplistic and straightforward way of setting aside money for retirement (and typically don’t grow your money very aggressively), they can be a foundational part of your overall portfolio, particularly high-yield savings. These accounts are very much like traditional savings accounts in that they’re insured by the Federal Deposit Insurance Corporation (and at credit unions by the National Credit Union Share Insurance Fund) for up to $250,000, but they typically offer a more favorable interest rate than traditional savings accounts.
When considering one, do your research and identify banks that offer the best interest rates for this type of account. Often, the most promising options will be found with online banks such as Axos, Ally Bank and others. “Go out and find the best rate,” says Brian Halbert, a financial adviser at WD Pensionmark. “It may take a few months, but the savings will start snowballing quickly.”
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Used primarily by those who have a high-deductible health insurance plan in order to set aside money to pay for medical expenses, health savings accounts (HSAs) can also double as a valuable retirement savings vehicle, says R.J. Weiss, a certified financial planner and founder of the personal finance site The Ways to Wealth.
“The benefit of investing in an HSA for retirement is they have a rare triple tax advantage,” says Weiss. “You can contribute money to them on a pre-tax basis, your HSA balance grows tax-free, and qualified withdrawals from an HSA are tax-free as well. In that sense, it acts very like a traditional 401(k) but allows you to have more control.”
Roth IRAs are one of the best options for both new investors and those who have years of experience, says Andrew Crème, a financial planner with Raymond James Financial Services’ Southwestern Investment Group. Most notably, you can open a Roth IRA at any age (so long as you have earned income).
“With a Roth account, you pay taxes on the money you invest today, but all of the growth in the account is tax free when you pull it out in retirement,” says Crème. “Another benefit is that you have the ability to pull what you contributed out at any time without any taxes or penalties so it can work as a secondary emergency fund in a pinch.”
Current laws allow for contributing as much as $6,000 annually to a Roth account, $7,000 if you're 50 or older. In addition, Roth IRAs have the unique benefit of not requiring minimum distributions once you turn 72, unlike other retirement accounts.
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Probably one of the most well-known retirement savings account options, a traditional IRA is an individual retirement account that provides a variety of benefits, says Ebony Howard, CPA with RetireGuide. “You make pre-tax contributions, and the investment earnings on those contributions in the account grow tax deferred,” explains Howard. “The contributions and investment earnings are not taxed until you make withdrawals in retirement.” What’s more, contributions to a traditional IRA may be fully or partially deductible on your annual tax filing, explains Howard.
In addition, funds can be withdrawn at any time, but there may be a 10% penalty for drawing money before age 59½. There are, however, various life events that allow for penalty-free use of the money including a first home purchase, birth of a child, adoption, and certain college expenses, says Howard. “Traditional IRAs may be a good choice for those who want tax benefits such as tax-deductible contributions and would like their earnings to grow tax deferred,” says Howard.
Individuals who are self-employed or own a small business will want to put the SEP IRA on their shortlist for building retirement income. A SEP IRA (SEP stands for "simplified employee pension") functions in much the same way as a traditional IRA. In other words, the contributions are tax-deductible, and the money grows tax-deferred until you retire. Any distributions you take from the account during retirement are taxed as income. The notable benefit of a SEP IRA is that it has a very high contribution limit.
“With a SEP IRA, you can contribute 25 percent of your pre-tax income up to $58,000. That's way more than a Roth IRA, which caps at only $6,000 a year,” says Jim Pendergast, senior vice president of altLINE, a division of The Southern Bank Co. “The SEP IRA is the traditional IRA's cousin. It's designed for the growing number of entrepreneurs and self-employed individuals in today's economy, which includes everyone from freelancers to independent contractors to solo business owners.”
A SIMPLE IRA is a retirement plan that allows employees of businesses with fewer than 100 workers to make tax-deferred contributions, explains Howard of RetireGuide. (SIMPLE is an acronym for Savings Incentive Match Plan for Employees.) “It is simply a small-company version of a 401(k) plan,” says Howard. “This workplace retirement savings account is easier to set up than 401(k)s. It allows eligible employees to invest a portion of their pre-tax salary into an individual account and receive mandatory employer contributions.”
This type of account may be a good choice for employees of small businesses who are seeking retirement accounts with minimal eligibility requirements and a commitment of employer contributions, according to Howard. “You’re eligible to participate in a SIMPLE IRA if you’ve received at least $5,000 in compensation,” continues Howard. “And employers must contribute to employee accounts. Employer contributions also vest immediately, meaning you have 100 percent ownership of all the money in your SIMPLE IRA.”
The 401(k) plan is among the most widely known and widely used retirement savings vehicles and should be a key part of your retirement portfolio if you have access to such a plan.
“It’s a company-sponsored retirement account that allows employees to save for retirement by contributing a portion of their wages to individual investment accounts on a pre-tax basis," Howard says. “An employee can choose a set percentage to automatically be taken out of each paycheck and invested in a 401(k) account. The investments are made up of stocks, bonds, and mutual funds that the employee can pick themselves or with the help of a plan administrator.”
The best of these plans include matching contributions from your employer, either dollar for dollar or up to a certain percentage. These plans are a good option for investors at all ages and stages, particularly when there’s an employer match involved, because that’s free money being contributed to your retirement savings efforts. You can begin withdrawing the money when you retire.
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Those employed by a non-profit organization or perhaps a tax-exempt company (think public school systems for instance) may have access to a 403(b) retirement account. These accounts operate much like a 401(k). Contributions can be made pre-tax from your paycheck, while earnings and returns in a regular 403(b) plan are tax-deferred until withdrawal. The current annual contribution limit is $19,500. The primary downside of this type of retirement account is that the investment choices are often more limited than in a 401(k).
A brokerage account can be used to grow your retirement nest egg through buying and selling stocks, bonds, and mutual funds. It’s a great approach for those who may be younger and need the money occasionally prior to retirement to cover other big financial events.
“In these accounts, you can invest your money and access it at any time without a penalty; however, you will have to pay taxes on the growth (capital gains) on the account,” says Crème of Raymond James Financial Services. “These are great accounts because they offer a few unique features. You can get tax deductions from the investments if you have losses, and you can access the money anytime with no penalty, so it’s great for goals prior to retirement like real estate.” The money in a brokerage account can be transferred in and out of the account very much like a checking or savings account.
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A less widely used type of retirement account, annuities are a contract between an individual and a typically a life insurance company. This type of retirement account is funded with either a lump-sum payment or periodic payments. In exchange for payments or deposits you make during what’s known as the accumulation phase, the insurance company offers you tax-deferred growth of the money and a guaranteed stream of income upon retirement either for a specified period of time or the remainder of your life.
There are insurance-based annuities and investment-based annuities. “Annuities work like a pension plan in that you can guarantee your future retirement income,” says Shawn Plummer, creator of the website Annuity Expert Advice. “The income for life can increase throughout retirement to keep up with inflation and maintain the retiree's lifestyle.”