How to Get Started Planning Your Retirement

Planning for retirement can feel scary, but here are a few steps to help you get started.

Commit to Saving Money Each Month

The first step to start saving for retirement is to commit to saving money each month. Putting together a basic budget will help you visualize how much you can set aside each month.

Figure Out How Much You Need to Save

Once you’ve committed to saving, start running a few numbers with a retirement calculator to understand how much you need to save. Figure out what you need to save monthly/per paycheck and set that amount aside.

Contribute to a Retirement Account

Once you know how much you can contribute, decide which retirement account to start putting money toward. Whether you’re an employee with access to a 401(k) or a self-employed business owner looking to open a new retirement account, find the account that best fits your goals and needs.
Putting aside money from each paycheck will help normalize investing and start taking advantage of the magic of compounding interest.

Consider Your Risk Tolerance

All investing carries the risk of loss, so consider how risky you want to be with your investment choices. Whether you’re investing in individual stocks (risky) or trying to preserve your capital by investing in fixed-income securities (less risky), how you handle the ups and downs of your portfolio should inform your target asset allocation.

The Best Retirement Plans to Consider in 2021

Investing toward retirement can feel overwhelming, especially with so many retirement plans available.
This guide is designed to help you quickly evaluate and choose the best retirement plan for your financial goals. Here are the best retirement plan options to choose from:

Retirement PlanProsConsDetails
Employer-Sponsored Plans 401(k), 403(k), 457(b)
  • Automatic payroll deduction
  • Potential matching funds
  • High contribution limits
  • (Non-Roth) Contributions are tax-deductible
  • No income limits
  • Automatic payroll deduction
  • Potential matching funds
  • High contribution limits
  • (Non-Roth) Contributions are tax-deductible
  • No income limits
Employer-sponsored retirement plans stay with your company’s investing custodian upon separation. You can roll these funds over (tax & penalty-free) to an IRA when you’re no longer employed with that company.
Individual Retirement Accounts (IRAs)
  • You choose the investment company (giving you more investing options).
  • Choose Roth or Traditional IRA for flexible tax savings options
  • Can open additional IRA for non-working spouse (joint filers only)
  • Lower contribution limits of $6,000 per year (or $7,000 if 50 or older)
  • Income limits of $140,000 for single, $208,000 for married filing joint taxpayers
IRAs require earned income in the year you contribute. You cannot contribute more than the income earned for the year.
When looking for an IRA broker, choose one with low account fees and low-cost funds.
Self-Employed Plans SEP IRA & Solo 401(k)
  • Much higher contribution limits than standard IRA options
  • More investment choices than standard 401(k) plans
  • May be able to set up through your existing bank or investment firm
  • Some plans are complicated to set up and maintain. Consult a licensed tax professional.
Both the Solo 401(k) and SEP IRA offer total contributions for self-employed up to $58,000 (as of 2021)
The Solo 401(k) allows a catch-up contribution for participants over 50 and older.
Pensions
  • Fully funded by employer; provides a fixed income for life
  • Can replace 30% or more of your average salary
  • Pensions disappear if the providing company goes out of business.
Pension plans are now only offered to 16% percent of private sector jobs (as of 2019).
Social Security
  • Government benefit, paid for life after you elect to start receiving it (age 62 or older)
  • Available to anyone who has received 40 work credits
  • Typically only replaces 30- 40% of your average income.
  • Benefits received before age 67 are reduced.
If you are a W2 employee, you already pay into social security on every paycheck. Just look for “FICA” on your paycheck stub.

The Best Retirement Plans to Consider in 2021

Investing toward retirement can feel overwhelming, especially with so many retirement plans available. This guide is designed to help you quickly evaluate and choose the best retirement plan for your financial goals.

Here are the best retirement plan options to choose from:

Best Retirement Plans Compared

The Best Company Retirement Plans: A Complete Comparison

One of the benefits of working for a company is paying into its employer-sponsored retirement plan. Most people are aware of 401(k)s, but – depending on where you’re employed – there are a few other options to consider.

401(k) Plan

The 401(k) plan is a defined contribution retirement plan offered by private employers to their employees. Employees typically have the option to contribute directly to their own account – directly from their paycheck. You can contribute up to $19,500 per year (or $26,000 if you’re 50 or older).

If your employer offers a company match, you may be eligible for one of the best benefits available from any retirement plan: Matching funds are contributed directly by your company to your 401(k) account, but that match is a percentage of your contributions. Remember, these matching funds are part of your compensation, and if you choose not to participate in the plan, you are leaving money on the table.

For example: An employer might offer a 50% match of your contributions (up to 5% of your salary). This means with a $100,000 salary – if you contribute $5,000 – your employer would contribute $2,500.

Note: Make sure to review your 401(k) fees and investing options before putting any money towards it.

403(b) Plan

The 403(b) plan is a defined contribution retirement plan that’s very similar to the 401(k). These are offered to employees of private non-profits and some government positions (including public schools). Employees can contribute through payroll deductions and the contribution limits are the same as the 401(k) plan.

As with other defined contribution plans, employers may offer a company match. These funds are paid by your company directly into your 403(b) account – in addition to your own contributions.

457 Plan

Also a defined contribution plan, 457 plans are offered to state and local government employees, as well as non-profit executives. Employees contribute directly from their paycheck and may also be offered matching funds from their employer (note: matching funds may be subject to a vesting schedule).

Contributions are limited to $19,500 per year and $26,000 for employees 50 or older. 457(b) plans are unique, as employees can access the funds prior to age 59.5 without penalty (though normal income taxes apply).

457(f) plans are specifically designed for nonprofit executives. However, if the executives don’t meet certain performance or tenure requirements, they may risk forfeiting the benefit.

Company Profit Sharing Plan

Profit sharing plans offer employees a percentage of a company’s profits and are usually paid out on a quarterly or annual basis. These plans are designed to give employees a sense of ownership while incentivizing bottom-line growth.

Employers have full control over how much profit is shared and how the profit is paid out. Funds may be paid in cash or company stock.

SIMPLE IRA

The SIMPLE IRA is an employer-sponsored retirement plan for small businesses with fewer than 101 employees. Employers can provide matching funds for up to 3% of employee contributions (or a 2% employer contribution), even if the employee chooses not to contribute.

The maximum employee contribution allowed is $13,500 per year (or $16,500 for employees 50 or older). To qualify and contribute to a SIMPLE IRA, you’d need at least $5,000 in earned-income during the previous two years.

These plans may work well for smaller companies with a few dozen employees, but for self-employed individuals, the total contributions allowed are far lower than other plans like the Solo 401(k) and SEP IRA.

The Best Retirement Plans that Anyone Can Open

Not all retirement accounts are tied to your employer. There are several excellent retirement accounts available to individual investors.

Individual Retirement Account (IRA)

One of the most popular retirement accounts are IRAs. They can be opened at any brokerage or investment firm that offers them. To qualify for contributing to an IRA, you must have earned income during the year.

There are two types of IRAs that you can open.

  1. Traditional IRA - This IRA allows you to deduct contributions from your current taxable income.
  2. Roth IRA - This IRA allows you to contribute after-tax dollars, but funds can be withdrawn tax-free at retirement.

You can contribute $6,000 per year to an IRA ($7,000 if age 50 or older).

Spousal IRA

If you are a married-filing-joint couple with only one working spouse, your family has the option to contribute to a spousal IRA. This individual retirement account waives the “earned income” qualification for the non-working spouse to contribute to their own IRA.

A spousal IRA has the same contribution limits of $6,000 per year ($7,000 for spouses ages 50 or older). It can also be either a Roth or traditional IRA, giving you flexibility in how it is taxed.

Rollover IRA

Rollover IRAs are designed as a way to move your previous employer-sponsored retirement plan after separating from that employer. Rolling over to a traditional IRA is tax-free, but be aware that moving a traditional work retirement plan to a Roth IRA will incur income taxes.

The biggest advantage is being able to choose which broker opens your rollover IRA (which provides greater flexibility in your investment choices). 

You can roll over your entire account balance, as there are no contribution limits. You can also transfer funds into the same rollover IRA each time you leave a job: There’s no need to open a new account.

The Best Retirement Plans for Self Employed Individuals

For the self-employed, there are several great ways to save for retirement while lowering your tax bill.

Solo 401(k)

The Solo 401(k) plan is a great option for self-employed individuals to contribute up to $58,000 per year of tax-deferred savings. These plans can be set up through a cooperating investment broker, which provides business owners flexibility in retirement plan and investment options.

The Solo 401(k) is designed specifically for single-employee businesses. Businesses with more than one employee do not qualify.

Self-employed participants can contribute up to $19,500 as an elective deferral per year. In addition, they can contribute up to 25% of their annual compensation, up to a total of $58,000  per year. For participants ages 50 and older, there is an additional $6,500 per year catch-up contribution available.

The Solo 401(k) also has a Roth option, allowing after-tax contributions to grow and be withdrawn tax-free.

Note: After reaching a total balance of $250,000 or more, owners are required to file an annual report (form 5500-SE) to the IRS each year.

SEP IRA

The Simple Employee Pension (SEP) IRA is an individual retirement account designed for self-employed individuals and small businesses. Only the employer can contribute, making this plan better-suited for the self-employed.

Similar to the Solo 401(k), the contribution is up to 25% of earnings (up to a maximum annual contribution of $58,000). There are no elective deferrals and no catch-up contributions in the SEP IRA plan.

There are, however, specific qualifications to participate in a SEP IRA:

  • Must be at least 21 years old
  • Must have worked in business 3 of out past 5 years
  • Must have made at least $600 from this employer/self-employment income for the year

SEP IRAs can be set up at any participating investment broker, giving owners flexibility in investment choices.

Individual Retirement Account (IRA)

Outside of the small business plans, opening and contributing to an IRA is another way that self-employed individuals can maximize their retirement contributions. Even if the individual has contributed to a Solo 401(k), they can open and max out their IRA contributions for the year ($6,000 total; $7,000 for ages 50 and up).

Note: To qualify for contributing to an IRA, please check the IRS website for details on IRA income limits.

The Best Retirement Plans for Couples

If you are married and file a joint tax return, there are a few retirement accounts that are best for couples.

Individual Retirement Account (IRA)

IRAs are great for married couples, as they allow each individual to contribute up to $6,000 per year into their own account ($7,000 if 50 or older). 

In addition, if only one spouse earns income for the year, married couples can open a spousal IRA. This allows the non-working spouse to fund their IRA up to the maximum each year.

Solo 401(k)

Designed for self-employed individuals, the Solo 401(k) only allows businesses with one employee to participate, with one notable exception: spouses.

If you own a business and your spouse participates in the business as an employee, you can effectively double your total annual retirement contributions as a couple.

Both you and your spouse can contribute up to $58,000 annually to a Solo 401(k) account, for a combined $116,000 in tax-advantaged investing each year.

Retirement Plans with Highest Contribution Limits

There are many retirement plans that encourage you to save, as well as give you a tax break. But which ones have the highest contributions limits?

Solo 401(k)

The Solo 401(k) allows up to $58,000 per year in contributions, but for married couples with a spouse working in the business, that amount could be doubled. With $116,000 in annual contributions allowed, the Solo 401(k) is a fantastic way to quickly stash away cash for retirement.

Note: The $58,000 contribution maximum is limited to 25% of business profits.

SEP IRA

The SEP IRA is another plan with a $58,000 annual contribution limit. If your spouse is an employee of the business, you can contribute up to $58,000 into their account as well. These contributions are limited to 25% of the employee’s compensation. 

This allows couples to contribute a total of $116,000 for the year. 

Note: Spouses must pass the eligibility requirements of joining the SEP IRA plan (see above).

Employer-Sponsored Retirement Plans: 401(k), 403(b) & 457

Employer-sponsored plans, like the 401(k), allow up to $19,500 in elective deferrals by employees for the year ($26,000 if age 50 or older). In addition, companies can match these contributions and even contribute up to a total of $58,000 per year.

Note: While employer-sponsored plans allow for a total contribution of up to $58,000, this would require a 100% match (or more), up to the maximum contribution allowed. Most employers contribute 10% (or less) in matching funds to the plan.

Retirement Plans with the Lowest Fees

Most retirement plans give you tax advantages, but not all plans cost the same amount. Here are a few of the best low-fee retirement account options.

Individual Retirement Account (IRA)

The magic of the IRA is that you choose where to open it. It isn’t tied to your job and you can shop around to find the best broker.

Many IRA accounts are offered without fees or minimum balances. IRAs usually have many investment choices, including some index funds and ETFs without fees or commissions. Some accounts may require a minimum investment to get started, but you shouldn’t be charged any fees to open or maintain your account.

SEP IRA

The SEP IRA is an individual retirement account for small business owners and their employees. Many of these accounts are now offered with zero account minimums, no opening/ closing fees, and $0 commission investment options (e.g. stocks, bonds, ETFs).

Solo 401(k)

Another account for self-employed individuals, the Solo 401(k) is now offered by many discount brokers. You should find one that offers no setup fees, no minimums, and the ability to trade and purchase securities without any commissions.

Are Pensions Still Around?

Also known as “the defined-benefit plan,” pensions are still offered to many state, local, and federal government positions. As of 2018, only 16% of private employers offered a version of a pension plan to employees.

Of those private jobs that include access to a pension, most are tied to worker’s unions.

While pensions are great for employees, providing lifetime pay (up to 30% - 40% of average lifetime earnings) they don’t make fiscal sense for most companies. With the average lifespan increasing, continuing to pay employees could be detrimental to a company’s bottom line.

A pension is only as reliable as the company providing it, so if that company fails, the pension money will no longer exist.

What About Federal Government Retirement Plans?

The federal government offers three distinct retirement plans but only social security is available to the general public.

Government Defined-Benefit Plan (Pension)

Most government employees have access to a pension plan which guarantees payment for life (based on a percentage of average salary times the number of years worked). Government plans are more stable than private company pension plans. 

Thrift Savings Plan (TSP)

Similar to a 401(k), the Thrift Savings Plan gives federal government employees access to tax-advantaged investing – directly from their paycheck. TSPs only offer 6 funds to invest in, but they cover different asset classes such as: US stocks, international stocks, fixed income, and bonds. 

Employees can contribute up to $19,500 per year (with a $6,500 catch-up contribution if ages 50 or older), with a government match of 5%.

Social Security

Available to all US taxpayers who qualify, Social Security is a retirement plan that every US worker pays into (except certain exempt individuals). These payments go to fund the Social Security program.

Based on an extremely complicated social security calculation, this retirement option typically replaces 30%-40% of a worker’s average income. Workers can access these funds as early as age 62 (with a decrease in payout), or as late as age 72 (with an increase in payout).

Social Security was designed only to supplement retirement incomes. It is best not to rely on Social Security benefits as your only or even main source of retirement income.

Retirement Plans That Are Inherently Risky

Not all retirement plans are a sure thing. There are even a few options that carry extra risk – carefully consider all the details of these options before investing in them.

Guaranteed Income Annuity (GIA)

If you’re looking for a steady stream of income during retirement, you may have looked into a guaranteed income annuity. These financial instruments are typically offered by insurance companies as a contract to provide you with guaranteed payments for life.

These contracts are typically purchased with a single lump sum payment, then multiplied by a set interest rate to arrive at the total balance. This sum will be available from the annuity to draw down in retirement (typically starting at age 59.5). Retirees receive monthly payments for the rest of their lives.

The problem is that most people don’t know when they’ll die, so they may pay too much for an annuity. Given the hefty fees – paid annually from the original investment – eating into your returns and the complexity of these financial products, and it’s easy to lose money when compared to a simpler investment strategy.

As always, consult with a licensed financial and tax professional before considering investing in these.

Cash Value Life Insurance

Cash value life insurance is a type of permanent life insurance that doubles as an investment vehicle. Premiums are typically much higher than a term life insurance policy. The premiums on these policies are used to pay for account fees, but they also accumulate cash value over time.

Under certain circumstances, you can withdraw some or all of the cash value while you are alive, but it will reduce the policy’s death benefit.The cash value of your policy at the time of death goes directly to the insurance company, not to your beneficiaries.

Before investing, consult with a licensed professional to understand how a cash value life insurance policy works.

Are Retirement Plans FDIC Insured?

Retirement plans at banks and credit unions may be insured by the FDIC or NCUA. This covers up to $250,000 in deposits per person. 

Retirement plans at investment firms will not be covered by the FDIC, but they typically offer SIPC insurance to cover up to $500,000 of invested funds.

All of these insurance options are backed by the US government in the event that a financial institution goes out of business.

How to Get Started Planning Your Retirement

Planning for retirement can feel scary, but here are a few steps to help you get started.

1. Commit to Saving Money Each Month

The first step to start saving for retirement is to commit to saving money each month. Putting together a basic budget will help you visualize how much you can set aside each month.

2. Figure Out How Much You Need to Save

Once you’ve committed to saving, start running a few numbers with a retirement calculator to understand how much you need to save. Figure out what you need to save monthly/per paycheck and set that amount aside.

3. Contribute to a Retirement Account

Once you know how much you can contribute, decide which retirement account to start putting money toward. Whether you’re an employee with access to a 401(k) or a self-employed business owner looking to open a new retirement account, find the account that best fits your goals and needs.

Putting aside money from each paycheck will help normalize investing and start taking advantage of the magic of compounding interest.

4. Consider Your Risk Tolerance

All investing carries the risk of loss, so consider how risky you want to be with your investment choices. Whether you’re investing in individual stocks (risky) or trying to preserve your capital by investing in fixed-income securities (less risky), how you handle the ups and downs of your portfolio should inform your target asset allocation.

How Many Retirement Plans Can I Have?

Funnily enough, there’s no limit to the amount of retirement accounts you can have. You can have two 401(k) accounts and 57 IRA accounts. The limits, however, revolve around the amount of money contributed to those retirement accounts.

For example, in your 57 IRAs, the total contribution limit between all of them is $6,000 per year (or $7,000 if 50 or older). No matter how many accounts you open, you cannot exceed the contribution limit without IRS penalties being imposed.

In Retirement Plans, What Does Vesting Mean?

Vesting is the period of time when an employee has to be employed to receive a portion (or all) of the matching funds in their employer-sponsored retirement plan. When an employer offers to match your contributions to your retirement plan, those funds are not yours yet.

Some companies have a laddered vesting schedule, meaning that you receive access to a percentage of those matching funds for each year that you’re employed – until you are “fully vested.”

For example: Philip’s employer offers a 4-year vesting schedule to fully receive his 401(k) matching funds. Every year, he earns 25% toward his match. His vesting ladder may look like this:

401(k) Graded Vesting Schedule

Philip can access all of his employer-matching funds after 4 years of employment. He would be “fully vested” and even if he left the company, he would be able to bring the matching funds with him.

Are Retirement Plans Taxable?

Retirement plans come with many different kinds of tax advantages, but ultimately, workers pay tax on their income one way or another.

Traditional retirement plans allow you to reduce your taxable income during the year you contribute, but require income tax to be paid when you withdraw. Roth plans allow you to contribute post-tax funds, but they grow and can be withdrawn tax-free. Pensions and Social Security are also taxed when they are withdrawn, subject to income limits.

Get Help Finding The Best Retirement Plan

If you're looking to find the best retirement plan, then consider the options below... 

 

 

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All of our content is verified for accuracy by Rachel Siegel, CFA and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about The Best Retirement Plans and How to Get Started Planning Your Retirement .

What Retirement Plan Should I Choose?

Choosing a retirement plan can feel overwhelming, but it doesn’t have to be. One of the simplest ways to get started is finding out whether your employer offers a retirement plan (even better if they offer a match, too). You can directly contribute through your paycheck. You don’t need to invest a large amount: Just start small and stay consistent.

Which Retirement Plans have  Tax-Deductible Contributions?

Most retirement plans can help you save on taxes, but to take immediate advantage of those deductions, you need to choose a traditional plan (not a Roth). Whether it’s a 401(k) or IRA, avoid choosing the Roth plan and you’ll lower your taxable income when you contribute.

Which Retirement Plans Are Protected from Creditors?

Employer-sponsored retirement plans (covered under ERISA) are protected from creditors and are protected when filing for bankruptcy. 

Individual Retirement Accounts (IRAs), however, are not fully protected from creditors – except when filing bankruptcy. Up to $1.3 Million is exempt from a bankruptcy proceeding when held in a traditional or Roth IRA.

Retirement plans aren’t exempt from amounts owed to the IRS.

Can Retirement Plans Be Affected by Divorce?

Yes. Unless previously stated as separate property in a prenuptial or postnuptial agreement, retirement assets are considered marital property and divided upon divorce.

Rachel Siegel, CFA
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Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years of experience in creating professional financial certification exams and another 20 years of college-level teaching.

If you have a question about The Best Retirement Plans and How to Get Started Planning Your Retirement , then please ask Rachel.

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All of the opinions expressed herein are the author's alone, and not those of any bank, brokerage, credit card issuer, lender, insurance company, outside financial institution, or any other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post or any other third parties.