Best Retirement Plans for 2023
It’s never too early or too late to save for retirement, but with so many options available, it can be tough to know where to put your money. The trick is to figure out what you qualify for and then maximize your contributions.
Read: With a Recession Looming, Make These 3 Retirement Moves To Stay on Track
Types of Retirement Plans
If you don’t already know how much money you need to retire, a retirement calculator can give you a good idea. The type of accounts you steer your money into will play a major role in how successful you are in reaching that goal. By blending two or three plans, you can develop a more diverse and flexible portfolio and design the best retirement plan for you.
IRAs: Individual retirement accounts are self-directed and offer basic tax advantages to grow your savings. Traditional and Roth IRAs both limit your annual contributions to $6,500 a year, with the option to make an additional $1,000 “catch-up” contribution once you turn 50.
Employer-sponsored retirement plans: These come with benefits for both employer and employee.
Self-employed retirement plans: A number of plans give small business owners, contract employees and self-employed workers the same opportunities to save for retirement as those working a typical 9-to-5 job.
9 Best Retirement Plans
Whether your employer offers a retirement package or you are responsible for your own retirement planning, here are nine highly recommended retirement plans to choose from:
1. Traditional IRA
With a traditional IRA, your contributions are tax-deductible, but you pay taxes on your contributions when you withdraw the funds. The catch is that you must take the required minimum distributions when you reach age 70.
2. Roth IRA
With a Roth IRA, you pay taxes now but make withdrawals tax-free once you reach retirement, and you’ll avoid paying capital gains taxes on the growth. You may contribute to a Roth IRA in years where your income is below $138,000 — or $218,000 for a married couple filing jointly.
3. Defined Contribution Plan
A defined contribution plan is also a pension. But rather than pay a guaranteed income in retirement, the employee collects their principal balance — made up of annual contributions from the employer and/or employee — plus any gains the contributions earned.
4. Federal Thrift Savings Plan
A TSP is essentially the 401(k) option for federal employees and our men and women in uniform. Employees can make tax-deductible contributions and automate those contributions. Many agencies match contributions up to a certain level, and there are traditional and Roth options. TSPs limit participants to a handful of basic, broad-based investments.
5. Nonqualified Deferred Compensation Plans
The employer defers some portion of the wages owed to the employee to a later date. In exchange, the employee earns a “reasonable” rate of return from the employer. It’s mostly used by executives with high salaries who have maxed out contributions to their other retirement accounts but still want some tax-advantaged retirement savings.
6. Solo 401(k)
A solo 401(k) is a 401(k) plan for sole proprietors and the self-employed. Contribution limits are the same as normal 401(k)s, but since you’re also the employer, you can match your own contributions and enjoy the additional tax benefits.
This differs from a traditional 401(k) as that is when employee contributions are deducted from your paycheck before taxes, so taxes are deferred until you collect the money in retirement. These are often also typically matched by employer contributions.
7. Cash Value Life Insurance Plan
A portion of your premiums go toward your policy premium, but some will be set aside to earn interest. You can then withdraw those funds later on as needed. The plan protects you in perpetuity and provides a guaranteed death benefit with a way to save, but returns are low.
8. Guaranteed Income Annuities
You use some of your retirement savings to purchase the annuity and then receive a check every month for the rest of your life. These annuities are notorious for earning large commissions for the advisors who sell them, so speak with a fee-only fiduciary financial advisor before you purchase one.
9. Defined Benefit Plan
A defined benefit plan is a pension plan that guarantees a set income level in retirement, based on how long you worked for a company and how much you earned. This traditional pension plan essentially provides you with a fixed income.
Alternative Retirement Plans
Take a look at these other types of retirement planning that may fit with your financial goals.
Roth 401(k): If you have a Roth 401(k), you’ll pay taxes on earned income now but won’t owe them when you draw on the account in retirement. Contribution limits are the same as for a regular 401(k).
SEP IRA: SEP IRA contributions are made by the employer, earning them a tax break. Even if you’re the only employee of your business, you can make larger annual contributions with a SEP IRA than with a traditional or Roth IRA.
SIMPLE IRA: Savings Incentive Match Plan for Employees is only available for businesses with 100 or fewer employees. Employers must usually contribute 3% of the employee’s elective contributions. Elective contributions are limited to $15,500 a year, with a $3,500 catch-up contribution beginning at age 50.
Social Security: A federal pension system that supplies a guaranteed income to retirees across the country. This is one plan that you’re probably getting one way or another.
Profit-Sharing: Profit-sharing retirement plans allow companies to share profits with their employees. These flexible plans can be offered in addition to other retirement plans.
Final Take
You have plenty of options for saving for retirement, many of which decrease your tax burden even as your money grows. So, rather than concern yourself with getting the one plan that’s just right, consider opening several different accounts so you’ll have more flexibility to save as much as possible.
FAQ
Here are the answers to some of the most frequently asked questions about retirement plans.
What is the best type of retirement plan?
There are different types of retirement plans you can choose from, and it is good to research which will best suit your needs. Examples include IRAs, employer-sponsored retirement plans or self-employed retirement plans.
Is it better to have a 401(k) or IRA?
Whether a 401(k) or an IRA would be the better fit for you would depend on your lifestyle and retirement goals. A 401(k) is usually offered by employers whereas an IRA can be opened by you alone. IRAs do offer a bit more flexibility for investments but a 401(k) offers flexibility with contribution limits.
What are the top five retirement plans?
Once you know what your retirement goals are, it will help you choose the best retirement plan for you. Here are the top five recommendations:
-Traditional IRA
-Roth IRA
-Defined contribution plan
-Federal Thrift Savings Plan
-Solo 401(k)
What is better than a 401(k) for retirement?
There are many alternatives to a 401(k) retirement plan that could work better for you such as the following:
-Traditional IRA
-Roth IRA
-Defined contribution plan
-Federal Thrift Savings Plan
-Nonqualified deferred compensation plans (NQDC)
-Cash value life insurance plan
-Guaranteed income annuities (GIA)
-Defined benefit plan
Joel Anderson contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: Best Retirement Plans for 2023
