What Types of Accounts Can I Use to Save for Retirement?

It is never too early to begin the retirement planning process. Even if you are starting your career, making regular contributions to a retirement savings account will help you begin building savings that can grow over the years and decades to come and provide you with the financial resources you need once you are ready to retire. However, there are many options available, and determining the right type of retirement account can sometimes be a confusing process. By understanding the types of accounts and retirement plans that may be used, you can make sure you will be able to properly plan for the future.

Options for Retirement Savings

In many cases, the choice of which type of retirement account to use will depend on the benefits offered by an employer. If an employee benefits package includes the ability to withdraw a certain amount from your pay and save these amounts in an employer-sponsored retirement account, this can make the process of saving for retirement simple and easy. If you change jobs in the future, you will maintain ownership of your retirement account, and if necessary, you will be able to roll the balance over into a new retirement account offered by a different employer or a separate individual retirement account. A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages.

• Leave the money in his/her former employer's plan, if permitted;
• Roll over the assets to his/her new employer's plan, if one is available and rollovers are permitted;
• Roll over to an IRA; or
• Cash out the account value.

Retirement savings plans will often fall into one of the following categories:

• 401(k) accounts - These are some of the most common retirement savings accounts offered by employers. In most cases, contributions to an account will be deducted from an employee’s wages or salary before taxes are applied. Employers may also match a certain percentage of the contributions that an employee makes, adding to the amount that is saved. These accounts have high contribution limits; in 2022, a person can contribute up to $20,500 or $27,000 if they are above the age of 50, and the limit for combined employer and employee contributions is $61,000 or $67,500 for employees over the age of 50. A person will be able to begin withdrawing funds from a retirement account after they reach the retirement age of 59 ½, and taxes will apply to these withdrawals.
• Individual retirement accounts (IRAs) - A person may open their own retirement account through a financial provider and begin making contributions. With traditional IRAs, contributions will reduce a person’s taxable income, and they will pay taxes when they withdraw funds after reaching retirement age. IRAs have lower contribution limits than 401Ks; in 2022, the limit is $6,000 or $7,000 for people over the age of 50.
• SIMPLE IRAs - Small businesses may offer these types of retirement savings plans for employees. They are treated similarly to traditional IRAs, although they have higher contribution limits. In 2022, this limit is $14,000 or $17,000 for employees over the age of 50. Employers who offer these types of plans are required to match employee contributions of up to 3 percent of an employee’s salary, or they may contribute 2 percent of a person’s salary, regardless of the amount the employee contributes.
• Roth IRAs - A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 1/2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. 

Contact a Naperville Retirement Planning Advisor

If you want to know more about your options for saving for retirement, or if you need guidance on the most appropriate options for you, The Krajniak Group is here to help. We can advise you on the best options that will fit your needs, and we can help you make adjustments as you experience changes in your life. For experienced DuPage County retirement planning services, contact us today at 630-364-2406.