The evolution of retirement accounts in America has yielded a dizzying array of choices for taxpayers seeking to build their nest eggs. Qualified plans were introduced in 1974, which gave us pension and profit-sharing plans, 401(k) plans and other defined benefit and defined contribution plans. Individual Retirement Accounts arrived in 1982, providing those who did not have access to an employer-sponsored retirement plan, with a means of saving for retirement on a tax-deferred basis. Roth IRAs came next, in 1997, and were followed by Roth 401(k)s and 403(b)s; governmental employees will soon see a Roth option in the Thrift Savings Plan (TSP). Annuities offer yet another avenue of tax-deferred savings, outside the scope of ERISA regulations.

TUTORIAL: Roth IRAs: Introduction

Plenty of Options
The plethora of retirement savings choices that are now available, can leave those who are seeking the best option scratching their heads in dismay. Even learning the basic characteristics of each of these plans and accounts can take weeks or months, and that information alone may not be enough to point them in the right direction. Of course, there is no single option or account that is best for everyone; the right choice for each person depends upon their situation and objectives.

Self-employed taxpayers should look at IRAs and self-employed savings accounts such as SEP plans or self-employed 401(k)s. (For related reading, see What Are Some Of The Features and Benefits Of SEP IRAs And Roth IRAs?)

The best option here will probably depend largely upon the level of income of the saver. Those who want to save $20,000-$30,000 each year will need to look at the latter two options, while lower-income workers may be better off contenting themselves with contributing to a traditional or Roth IRA.

Employees who are eligible to contribute to a company plan, are usually best advised to do this first, assuming that the investment choices within the plan are at all competitive. This is especially true if the employer offers any type of matching contribution, which is often the case.

Those who will benefit substantially from a current deduction for their retirement plan contributions, may be wise to stick to traditional IRAs and qualified plans, while those who do not will probably be better off with Roth accounts.

Employer-Sponsored Roth
Upper-income taxpayers with incomes that are too high to permit Roth IRA contributions, may still be able to contribute to an employer-sponsored Roth plan at work, if this is available. Highly-compensated executives who seek to make retirement plan contributions in excess of IRA and qualified plan limits, should look to non-qualified plans, such as deferred compensation or executive bonus plans.

Annuities represent another vehicle that investors of all stripes can use to save money for retirement; although money that is placed inside these contracts is not deductible, unless the annuity itself is used inside an IRA or qualified plan, there are no limits on the amount of money that may be placed inside these contracts, which also makes them popular with wealthy investors looking to shield large amounts of money from current taxation. (For related reading, see Business Owners: How To Set Up An SEP IRA.)

The Bottom Line
For more information on retirement plans and accounts, download Pub. 575 on Pension and Annuity Income and Pub. 590 on IRAs from the IRS website at www.irs.gov or consult your HR representative or financial advisor.

Related Articles
  1. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  2. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
  3. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  4. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  5. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  6. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  7. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Retirement

    Maxing Out Your 401(k) Is Profitable: Here's Why

    It's shocking, but most American workers (73%) have no 401(k) retirement funds. Start saving now to anchor your retirement.
  10. Professionals

    Top Questions to Ask When Choosing a Robo-Advisor

    Think a robo-advisor might be the right choice for you? Be sure to ask these questions first.
RELATED TERMS
  1. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  2. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  3. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  4. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  5. Benefits Payable Exclusion

    An insurance policy exclusion that removes the insurer’s responsibility ...
  6. Contingent Annuitant

    Someone designated by an annuitant to receive the annuitant’s ...
RELATED FAQS
  1. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  2. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>
  3. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  4. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  5. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  6. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!