How to Choose Between Different Retirement Plans

Estimated Read Time: ~10 minutes

Reviewer: Adam Olson, CFP®, LUTCF, FSCP, RICP
Wealth and Retirement Strategist

Summary: Understanding the different types of tax-advantaged retirement accounts can help you prepare for your retirement. Whether you have an employer or are self-employed, learn about the unique features of different retirement plans, their pros and cons and factors to consider when deciding which to choose.

Retirement planning is key to ensuring a comfortable future in your senior years. Luckily, there are different retirement plans, with varying benefits, designed to encourage you to set aside money for retirement.

When choosing the best retirement plan for you, or a combination of retirement plans, it’s important to understand the various retirement account types or options.

Employer-sponsored retirement accounts

If you work for an employer, you might have access to a retirement account through work. You can decide to withhold a set amount of money from each paycheck and direct it into the account provided by your employer. Some employers match your contribution up to a certain percentage of your income. A matching contribution can boost your ability to grow your account and make it one of the best retirement plan options for your needs.

There are three main types of employer-sponsored retirement accounts:

• 401(k): Companies design this type of retirement plan for their employees, and it is one of the most common options available.
• 403(b): Public sector employees, as well as nonprofit entities, including those with 501(c)(3) tax-exempt status. Often, religious, charitable and educational organizations fall into the category that offers 403(b) types of retirement plans.
• 457(b): An employee of a state or local government might have access to this type of retirement plan.

These retirement plans share common features, like identical annual contribution limits and offer the opportunity to choose a Roth option.

Annual contribution limits

You can only contribute a certain amount to your tax-advantaged retirement savings account. However, if you’re older, you can make a catch-up contribution and give a boost to your retirement plan. These amounts may change on an annual basis, so it’s best to consult with a financial professional to ensure you are maximizing your contribution.

Required minimum distribution

Traditional retirement savings accounts come with required minimum distributions (RMDs) when you reach a certain age. Currently, if you were born between 1951 and 1959, you must start taking RMDs from your traditional account at age 73. If you were born in 1960 or later, your RMDs begin at age 75.

The amount you’re required to take from retirement savings depends on several factors, including the size of your account, your age and your spouse’s age. You generally pay taxes on the withdrawal, although you can reduce your taxes by donating to charity or taking other steps.

RMDs are not required with Roth retirement accounts, making them appealing for tax-efficient retirement planning.

What is a solo 401(k)?

If you’re self-employed, you can get a version of an employer-sponsored retirement plan with the solo 401(k). The solo 401(k) comes with a higher contribution limit because you can make a contribution as both employer and employee, including a match. As a result, the annual limit on contributions is up to $72,000.

Realize that you aren’t eligible for a solo 401(k) unless you have no other employees beyond your spouse. You can open a solo 401(k) only if your small business doesn’t hire outside employees.

Roth retirement plans

When you contribute money to a traditional retirement plan, your employer usually takes it out of your paycheck before paying taxes. You get a tax benefit today with these traditional retirement plans, seeing a reduction in your taxable income.

Switching to the Roth version of your retirement plan changes the tax calculation. You fund a Roth retirement account with after-tax dollars, so you don’t get an immediate tax advantage. Instead, the money in your account grows tax-free over time, and you withdraw the money at retirement without paying a tax bill.

You can also split your contributions between Roth and traditional retirement accounts if your employer allows it. Some individuals believe that the best retirement plan approach is a mixed tax strategy. Note that not all employers offer Roth options, so this strategy may not apply to everyone.

Understand, though, that the total between your traditional and Roth retirements is equal to the overall annual contribution limit for your 401(k), 403(b) or 457(b).

Pros and cons of employer-sponsored retirement plans

Pro	Cons
Might have access to an employer match	Limited investment options
Automatic paycheck deduction	You might need to wait a set period before you’re full vested
Can be tax-deductible today or offer a tax-free withdrawal later	Not all employers offer Roth options of these types of retirements

Individual retirement accounts (IRAs)

If you don’t have access to an employer-sponsored retirement plan, or if you have extra money to contribute after maxing out your other retirement savings contributions, you can open an individual retirement account (IRA).

Some employers sponsor IRAs, but you’re more likely to find different types of retirement plans in this category, divided based on whether you own a business. As a result, some individuals prefer an IRA, even if they still have room to contribute to a workplace plan. IRAs have varying limits and usually different needs for employee matches or contributions.

The best retirement plan is the one that helps you save, regardless of contribution limits, fees and investment choices.

Traditional and Roth IRAs

You can contribute to a traditional or Roth IRA in addition to an employer‑sponsored retirement plan to expand your retirement savings. Some employees prefer using an IRA after maxing out their employer match and then switching back to 401(k) contributions after reaching the IRA contribution limit.

Currently, you can contribute up to $7,500 to one of these different retirement plans, a traditional or Roth IRA. Note that you only get $7,500 for both. Currently, you can make a catch-up contribution of up to $1,100 if you are age 50 and older.

As with employer-sponsored plans, the traditional IRA retirement savings plan offers a tax deduction today, but you need to pay regular income tax on withdrawals during retirement. A Roth IRA doesn’t offer an immediate tax benefit, but you don’t have to pay taxes when you withdraw money during retirement.

Deductions for traditional IRA contributions are phased out if you or your spouse has a workplace plan. Currently, the phase-out begins at an annual income of $81,000 for single filers and $129,000 for joint filers. The phase-out is complete, and you’re ineligible for a deduction once your income reaches $91,000 a year for single filers and $149,000 for joint filers.

Currently, Roth IRA contributions begin to phase out for single filers at $153,000 of modified adjusted gross income and are not allowed once income reaches $168,000; for married couples filing jointly, contributions are fully phased out at $252,000.

Pros and cons of regular IRAs

Pro	Cons
A wider variety of investments to choose from	Lower annual contributionlimits than other types of retirement plans
You can choose a Roth version without worrying about whether an employer offers it	Phase-out for claiming a tax deduction if you are covered by a workplace plan
It’s possible to withdraw your Roth contributions with no penalties	Roth IRAs come with income limits; you might not be able to contribute

Simplified employee pension (SEP) IRA

With a SEP IRA, you can make a much higher contribution to your retirement savings, hopefully allowing your money to last longer later. Your annual limit is the lesser of 25% of your compensation or $72,000.

As with other types of retirement plans, you can choose to use a Roth version of this IRA to reduce your taxes when you withdraw money from your account later.

If you’re self-employed, you can use this strategy to save money for the future. However, it’s important to note that if you have employees, you must contribute at the same level to them. You can adjust the amount paid to each employee, but it has to be uniform across the business. Consider this before establishing this type of IRA for yourself and your employees.

Pros and cons of a SEP IRA

Pro	Cons
Higher contribution limit	You’re required to contribute to other employees if you have them
Choose a Roth or traditional type of IRA	Contributions must be uniform, usually a percentage of income
Can help self-employed workers save more for retirement

Savings incentive match plan for employees (SIMPLE) IRA

A SIMPLE IRA lets both employees and their employers make contributions to individual retirement accounts set up for the employees. This plan is ideal for small businesses that don’t currently offer a retirement plan and that generally have under 100 employees.

You can choose to make a matching employee contribution of 3% or you must make a 2% contribution to every employee. The SIMPLE IRA also has a Roth version available. You can decide whether that makes sense for you or whether you want your tax deduction today.

On the employee side, the annual contribution limit is $17,000 for this IRA. However, the catch-up contribution for 50+ is $4,000, and there’s a $5,250 super catch-up option for those 61, 62 or 63 years of age.

Pros and cons of a SEP IRA

Pro	Cons
Potential for higher contributions if you add to savings as an employer and employee	You must make a contribution for each employee if you are a business owner
Super catch-up contributions are available	Contribution limits are lower than for the SEP IRA
	Not suitable if your company grows beyond 100 employees

How to choose the best retirement plan

Choosing the best retirement plan for you requires considering your current and future needs. For many people, an employer-sponsored plan augmented with an IRA might be a good choice. Pay attention to the limits on annual contributions, as it might make sense to use different types of retirement plans to achieve your goals.

Look for a plan with investment options that will help you reach your long-term goals. Consider consulting with a financial professional at Mutual of Omaha who can work with you to review your retirement plan options and create an approach that is best suited for your needs.

Frequently asked questions (FAQs)

What is the most popular retirement plan?

Different types of IRAs are popular because anyone can open a traditional or Roth IRA as long as they have earned income. Many investment platforms offer IRAs, which also makes them popular and widespread. However, the 401(k) is very common, as it is offered by employers.

Which IRAs are most ideal for business owners?

A small business owner might use an IRA as a retirement plan for their employees. The SEP IRA and SIMPLE IRA are examples of IRAs that small businesses can offer to employees. Each comes with a Roth IRA option as well. However, there are rules associated with each of these, so consider the requirements before offering IRAs to employees, or you could be subject to a penalty. Are there penalties for withdrawing from different types of retirement plans early?

Because they are tax-advantaged accounts, retirement plans have rules on withdrawals. You generally need to reach age 59 1/2 before you can withdraw from each account without paying a penalty. However, exceptions exist based on situations like schooling, home buying, or hardship.

---

Reviewer: Adam Olson, CFP®, LUTCF, FSCP, RICP

Wealth and Retirement Strategist

Adam is a Certified Financial Planner, author and podcast host with a deep passion for helping clients navigate all aspects of personal finance, from financial planning and investment management to life and health insurance. His goal is to empower individuals and families with the knowledge and tools they need to make confident financial decisions. He resides in Norfolk, Nebraska with his wife, Katie, where they are raising their four boys.

---

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.  Mutual of Omaha Advisors is a division of Mutual of Omaha Insurance Company.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

642660