• Aging Well Denver

6 Different Types of Retirement Account Explained


Understanding how to save for retirement can feel like trying to learn a new language and many Americans don't understand the importance of having a savings plan at all. According to AARP, in order to live off of $40,000 a year, a retiree needs to have saved $1.8 million for a 30-year retirement. Unfortunately, a study done in 2017 by GoBankingRatings found that 57 percent of those polled had less than $1000 in savings and 39 percent had no savings at all.



We know it can be overwhelming and maybe even seem unnecessary to start saving for something that is so far away, but it's never too early to begin a retirement account. In fact, it is recommended that people have 4.6 times their annual salary saved by age 50 and that amount goes up the more money you make. If you haven't started yet, don't panic. We recommend speaking with a financial advisor to help you determine your exact needs but that doesn't mean you can't go in with a little bit more knowledge. We're breaking down 6 different types of retirement accounts so you can feel more confident creating a plan that works for you.


401(k) Plans - A 401(k) is a workplace retirement account, offered as an employee benefit. For the average person, these types of plans will be the easiest and most convenient places to start investing for retirement. Your financial institution will have already been chosen for you, by your employer, and the money will be taken, pre-tax, out of your paycheck and contributed to these accounts. One of the benefits of contributing pre-tax money is it lowers the amount of income your taxes are based on (If you earn $75,000 and contribute $10,000, you are taxed on a $65,000 income). There will be a list of investment options to choose from and you may even get an employer match depending on your companies policy. You can contribute up to $18,500 for 2018. Individuals, 50 years of age or older, can also make an additional $6,000 catch up contribution.


Solo 401(k) - A sole proprietor or small business owner can set up an individual 401(k) but this can also be set up for someone working for a spouse. This account is similar to the 401(k) listed above. You will be allowed to make contributions as both the employee and employer. You could potentially contribute up to a total of $55,000 in 2018 (or $61,000 for someone 50 years of age or older). Total contributions will depend on your net business income.


Individual Retirement Account (IRA) - An IRA is a tax-favored retirement account that lets you contribute a certain amount each year and invest your contributions tax-deferred. That means you pay no taxes on annual investment gains (which helps them to grow more quickly). With a regular IRA, you pay income taxes on the money when it's withdrawn at retirement. If you don't have a 401(k) retirement account at work, you should also be able to deduct IRA contributions on your annual income tax return. You can buy and sell investments within the IRA, but if you try to cash you entirely before retirement age at 59 ½ (known as an early distribution), you will most likely pay a 10 percent penalty fee and may be subject to federal, state and local income taxes.


Roth IRA - When it comes to taxes, this IRA works differently than the other retirement accounts. Contributions will be made post-tax meaning you will not get a tax deduction when you put in money. But why would you put in money if I don’t get a tax deduction? Well, your money will grow tax-free while in the account. The biggest benefit of the Roth IRA is the money will come out tax-free after you reach the age of 59 ½ and that's not even the best part: you can take withdraw contributions you've made to a Roth IRA before retirement age without penalties.


SEP IRA - Simplified Employee Pension, the SEP IRA is easier to set up than a Solo 401(k) but harder to max out pre-tax contributions. This account is typically used by people with self-employment income or small business owners. As the employer, you can contribute up to 25% of your income, or $55,000, whichever is less.


Simple IRA - This type of plan allows smaller employers (businesses with less than 100 employees) to set up a workplace IRA. This type of plan comes with a little less paperwork and administration expenses employer versus setting up a proper 401(k) plan. You, as the employer, will have to either match some level of contribution or make an unmatched contribution even if you do not contribute. An employee can contribute up to $12,500 for 2018 and there is a $3,000 catch up contribution allowed for workers who are 50-years-old or older. Plus the employer matching contributions.


To learn more about different retirement account options and the regulations, click this link (IRS.gov). For AARP's helpful retirement tools, click this link (AARP.org/retirement)