Retirement Savings Accounts: The Basics  

By Brittany Goodwillie, CFP®

Maybe you’ve heard that you should be saving for retirement, but you don’t know where to start.  Or maybe you are already saving, but you don’t understand all of your options. The general idea of a retirement account is to put away money to grow so that you can use it when you need it for expenses later on in life.  Sounds pretty simple, right? Yet there isn’t just one type of retirement account and not everyone has access to all types of accounts. Each account has different contribution limits and some work better than others in certain situations.

Employer-sponsored retirement plans

An employer-sponsored plan is one that your employer provides for you.  There are different types of accounts depending on who you are employed by.  Below are explanations for some of the main types.

  • A 401(k) is the most common employer-sponsored plan.  Eligible employees can make pre-tax contributions (and in some cases after-tax as well) through payroll deductions. Many employers will match employee contributions and some will also provide profit-sharing contributions.  Employees who contribute are able to choose from a list of investment options available in their particular plan. As the account value increases, growth is tax-deferred (meaning that individuals don’t have to pay capital gains tax each year).  After age 59 ½, distributions can be taken from the account without penalty. When taking distributions, employees will pay regular income taxes on all pre-tax contributions, employer match money they are vested in, and any investment gains in the account since those contributions were made.  Starting at age 70 ½, employees must take required minimum distributions from their accounts.

  • A 403(b) is very similar to a 401(k) in how it works.  Employees can make tax-deductible contributions, the account grows tax-deferred, and distributions are taxable when you take them out.  The difference is that it is used by a 501(c)(3) organization, which often includes public schools, colleges, universities, charities, and governmental organizations.  403(b) plans often allow multiple providers to manage them, which means an employee not only has to choose investments, but also which provider to use.

  • A 457 plan is a different type of retirement plan that can be used by 501(c)(3) organizations discussed above.  The plan works the same way as a 403(b) with one main difference. Distributions from the plan cannot be taken without penalty until the individual is 70 ½, as long as they are still working at the employer sponsoring their plan.  However, once they leave the employer, they can take distributions at any age without penalty.

  • A Thrift Savings Plans, or TSP, is a retirement plan offered by the federal government to some government employees.  Other than the fact that it is sponsored by the federal government and not an employer, the plan is very similar to a 401(k).  Employees can make tax-deductible contributions, the account grows tax-deferred, and distributions are taxable when you take them out.  One thing to note is that even if employees don’t contribute to the plan, there is an employer contribution of 1% of salary for all eligible employees.

Within these various accounts, some employees will have the ability to make Roth contributions in addition to pre-tax contributions.  A Roth contribution is an after-tax contribution, meaning that the employee contributions made are not tax-deductible, but the contributions, and any investment gains from those contributions, can be withdrawn tax-free in retirement.  Whether or not a Roth option is offered depends on your employer.

2018 Contribution Limit: $18,500 per participant

2018 Catch Up Contribution (for those age 50 and up): $6,000 per participant

Note: These limits apply to traditional and Roth contributions combined

Non employer-sponsored retirement plans

Anyone with earned income can save for retirement through an IRA, or individual retirement account.  If your employer doesn’t offer a plan, or doesn’t give you a match and doesn’t have great investment options, saving into an IRA could be a good option for you.  

With a traditional IRA, certain individuals can make tax-deductible contributions, the account grows tax-deferred, and individuals will pay taxes on the distributions.  Contributions to a traditional IRA are only tax-deductible for employees below income thresholds and those without an employer-sponsored plan. Making non-deductible IRA contributions can create complicated tax implications, so be sure to talk with a professional before doing so.

A Roth IRA offers the opposite tax advantages than a traditional IRA.  Individuals will pay tax on contributions today without getting a deduction. In retirement, withdrawals from a Roth IRA are tax-free.  However, there are income restrictions to be eligible to contribute to a Roth IRA. For 2018, you can only make a full contribution if your Modified AGI is below $120,000 for a single individual and below $189,000 for a married couple.   

2018 Contribution Limit:  $5,500 per individual

2018 Catch Up Contribution (for those age 50 and up): $1,000 per individual

Note: These limits apply to traditional and Roth contributions combined

Self-employed retirement plans

Self-employed individuals have different retirement plan options.  The most common self-employed retirement plans include Solo 401(k)s, SEP IRAs, and SIMPLE 401(k)s.  The best plan for self-employed individuals depends on how many employees they have, how flexible they need to be, and how much they are able to contribute.  

2018 Contribution Limit: Different for each account and outlined in the table below

Other Ways to Save for Retirement

There are other ways to save for retirement other than specific retirement accounts.  

HSAs, or health savings accounts, are triple-tax advantaged savings tools available to certain individuals.  Check out my prior blog post about HSAs to learn how you can invest HSA funds to be used as retirement savings.  

Once you have maximized annual savings in all of your other retirement accounts, you can also save for retirement in a taxable brokerage account.  

Overview of 2018 Retirement Savings Accounts

Retirement_Account_Contribution_Limits_2018

Have you started saving for retirement?  Are your accounts organized and do you have an advisor to help manage your assets and keep you on track to meet your retirement goals?  Schedule an introductory phone call to learn more about working with Autumn Financial Advisors, LLC today!