The 5 retirement investments you should know about
Today’s financial landscape has a wide range of retirement investment options available. While these savings and income tools can help you retire with confidence, the sheer number of options often leave many Americans with a lot of questions.
If you’ve wondered if you need a 401(k) or an IRA (or both), or what an annuity is, keep reading.
Retirement plans:
What is a retirement plan?
- Special investment plans or accounts that are designed to help you save money for retirement over the long term
- They may offer potential tax advantages over a normal savings or investment account
401(k)
A company-sponsored retirement savings plan that you receive through your employer
Who is it for?
- Employees of a company that sponsors a plan
How does it grow?
- To start, you contribute to the plan by paying a percentage of each paycheck directly into the 401(k) account
- Your contributions are then invested to take advantage of growth potential over time
Are there contribution limits?
- $22,500 per year for workers under age 501
- Workers age 50 or older may contribute an additional $7,5001
- Visit gov/retirement-plans for the most up-to-date contribution limits
What are the advantages?
- Traditional 401(k) contributions are deducted from your paycheck pre-tax, meaning both your contributions and earnings grow tax-deferred, allowing your plan to grow faster over time
- Roth 401(k) contributions are deducted from your paycheck post-tax, but you pay no income tax on your investment growth when you take withdrawals after you reach age 59½ and have had your account for five years
- Employers may match a portion of your 401(k) contributions
What are the downsides?
- Traditional 401(k) withdrawals are taxable as regular income in the year you take them
- Roth 401(k) contributions are made with post-tax dollars, lowering your take-home pay more than a traditional 401(k)
- There can be a penalty for withdrawing before age 59 ½
- You have to start taking Required Minimum Distributions (RMDs) at age 732
- Fewer investment options than an IRA
403(b)
A retirement savings plan for employees of tax-exempt organizations, like public schools, state universities, or religious organizations
Who is it for?
- Exclusively for employees of tax-exempt organizations
How does it grow?
- Like a 401(k), you contribute a percentage of each paycheck directly into the account
Contribution limits?
- $22,500 per year for workers under age 503
- Workers over age 50 may contribute an additional $7,500 per year3
- Workers with 15 years of service may be eligible to contribute up to an additional $3,000 per year3
- Visit gov/retirement-plans for the most up-to-date contribution limits
What are the advantages?
- Contributions are deducted from your paycheck pre-tax, and grow tax-deferred
- If you work for certain employers, your contribution limits increase after 15 years of employment
- Employers may match part of your contribution
What are the downsides?
- Fewer investment options than a 401(k)
- There can be a penalty for withdrawing before age 59 ½
Individual retirement account (IRA)
A special savings account that you open with a financial institution that’s designed to help you save money for retirement
Who is it for?
- Any individual who has earned taxable income
How does it grow?
- Like a traditional savings account, you contribute money at-will
- Funds are invested by the financial institution according to your preferences
Contribution limits?
- $6,500 per year if you are under age 504
- $7,500 per year if you are over age 504
What are the advantages?
- Contributions may be tax-deductible and grow tax-deferred
- IRAs allow investment in a wide variety of financial products
What are the downsides?
- Withdrawals are taxed as income
- Deductibility of contributions may vary based on income, access to a qualified retirement plan, and tax filing status
- There can be a penalty for withdrawing before age 59 ½
- Starting at age 73, you are required to start withdrawing a certain amount from the account (a Required Minimum Distribution (RMD)
Roth IRA
A long-term retirement savings account where you pay taxes on the money you put in instead of the money you take out
Who is it for?
- Any individual who has earned taxable income under certain limits
How does it grow?
- Like a traditional savings account, you contribute money at-will
- Funds are invested by the financial institution according to your preferences
Contribution limits?
- $6,500 per year for workers under age 504
- $7,500 per year for workers over age 504
- Contribution limits are reduced if your income is above certain amounts (see disadvantages)
What are the advantages?
- Unlike a traditional IRA, withdrawals from a Roth IRA taken after you reach age 59½ and have had your account for five years (qualified distributions) are not taxed
- Similar wide range of available investments as a traditional IRA
What are the downsides?
- Contributions to a Roth IRA are not tax-deductible
- Eligibility is limited by income. For example, a single individual who earns more than $153,000 is not eligible to contribute to a Roth IRA. This limit changes based on your income tax filing status, and is adjusted semi-regularly
Annuities:
What is an annuity?
A contract between you and an insurance company where you pay a sum of money in exchange for income over a period of time, usually in retirement
Single premium immediate annuity (SPIA)
How does it work?
- You pay a lump sum upfront for immediate, guaranteed income over an agreed upon time period
Deferred income annuity (DIA)
How does it work?
- You pay a lump sum upfront for guaranteed income at a time in the future, usually during retirement
Fixed annuity
How does it work?
- You can make a lump sum contribution, or pay a premium over time with a guaranteed rate of return, then receive guaranteed income when you retire
Variable annuity
How does it work?
- A variable annuity is an annuity that works similarly to a retirement account
- You can make a lump sum contribution, or pay a premium over time with a rate of return that varies with market investments like stocks, then receive income based on your accumulated value when you retire
- Variable annuities have a potentially higher upside but also higher risk — you can lose money on a variable annuity
Index annuity
How does it work?
- You can make a lump sum contribution, or pay a premium over time with a rate of return that varies with the index performance (but never less than zero), then receive guaranteed income when you retire.
- Offers opportunity to benefit from market gains and protection from downturns.
- Shares characteristics with both fixed and variable annuities.
How do I know which investments are right for me?
The exact investments or combination of investments you need to retire with confidence depends a lot on your goals and financial circumstances. The best way to get it right is to talk to a financial professional. They can help you align your goals with the retirement strategy that can get you to them! Set up a meeting to discuss your retirement options today.
