What are the Different Types of Retirement Investment Accounts – and Which is Right for You?

Whether you’re just now beginning the journey of planning for retirement or you’re considering switching plans, you may be wondering…what are the different types of retirement investment accounts?

After all, the tax advantages each plan offers differ greatly – as do contribution limits and withdrawal rules. Moreover, certain plans are designed with a specific type of person in mind – like a business owner or independent contractor. Navigating all this and picking the best type of retirement plan for your unique needs can be daunting – but we’re here to help.

Below, we’ll demystify everything you need to know about the different types of retirement accounts. At the most basic level, there are two types: the IRA and the 401K. However, there are quite a few sub-categories of these plans that you need to consider.

We’ll cover all this and more – helping you determine which retirement plan offers the most benefits. And, we’ll provide you additional tips for getting started and managing your plan over time. Let’s get started!

Why Choosing the Right Type of Retirement Investment Account Cannot be Overlooked

Choosing the right type of retirement investment account can make all the difference when it comes to achieving your retirement goals. Each different plan offers different tax advantages, contribution limits, and withdrawal rules – so picking the best one for you is essential.

For example, if you’re a business owner or self-employed individual, a SEP IRA may be the best choice since it allows higher contributions than other types of plans. Or, if you want to take advantage of certain tax breaks now, you might choose a Roth IRA which allows for after-tax contributions that are fully taxed on withdrawals.

You’ll also want to consider what sort of plan your spouse has if applicable – as this also plays a role in determining which plan makes the most sense for you. For example, if your spouse has a retirement plan that offers tax advantages in the here and now, it may make more sense for you to take the opposite approach – diversifying your collective retirement plan.

It’s important to remember that each type of retirement plan has its advantages and disadvantages – so understanding all this before making any decisions is key! With that said, let’s discuss the two main types of retirement investment accounts below.

What are the Different Types of Retirement Accounts? 401k vs Traditional IRA

At its core, this topic can be broken down into simply 401K vs traditional IRA. While each of these types of retirement plans has different classifications underneath them, understanding these two types is a great starting point.

401K

A 401K is a retirement plan offered by employers and allows employees to save and invest for retirement on a tax-deferred basis. This means your contributions are deducted from your paycheck before taxes – resulting in lower taxable income now. And, any earnings grow without being taxed until you start taking distributions during retirement age.

Most employers also offer matching contributions – allowing for additional savings growth. This is essentially free money being sent to your retirement account. And, the contribution limits on 401Ks are very high – you can contribute up to $20,500 in 2022 ($27,000 if you’re over the age of 50). In addition, some 401K plans may also offer other benefits such as borrowing opportunities or financial planning tools.

However, it’s worth noting that investment options in a typical 401K can be quite limited. You won’t have much control over what exactly your retirement plan investments entail. And, some employers have a vesting period that you need to make it through before you truly “own” the contributions they’ve matched.

While it’s great that you can contribute tax-deferred money to this account, that cash is getting taxed at some point – Uncle Sam would never let you get away with not sharing a piece of your pie with him! So – when you withdraw funds at the time of retirement, you can expect to be taxed. On that note, you’ll be penalized on withdrawals before age 59.5.

Traditional IRA

On the other hand, a traditional IRA (Individual Retirement Arrangement) is available to everyone – even those who aren’t employed in the traditional sense of the word. Thus, many self-employed people flock to this type of retirement plan. And it’s clear to see why.

With this plan, you have way more types of investments for retirement to choose from. You’re not limited to just mutual funds like a 401K.  You can invest in stocks, bonds, or anything else – as long as it’s approved by the IRS. The main draw here is taxes on withdrawals later on. With a traditional IRA, you get to enjoy tax-free growth and any withdrawals are taxed as regular income – very similar to the 401k. The age restrictions are similar to 401ks as well.

However, the contribution limits are a bit lower – you can only contribute up to $6,000 in 2021 (or $7,000 if over 50). And, just like a 401K, there may be some penalties for taking money too early.

Breaking Down the Different Types of Retirement Accounts Even Further:

Now that we’ve gone over two of the major types of retirement plans – let’s break down some of the other types of retirement accounts that fall under the umbrellas of 401ks and traditional IRAs. We’ll begin with one of the most popular choices of all – the Roth IRA.

Roth IRA

A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars. This means the money has already been taxed at your current tax rate and can grow without being taxed again. Thus, when you make withdrawals at retirement age – it will not be counted as taxable income! This makes Roth IRAs very popular for those who are expecting their tax rates to increase over their lifetime.

Another reason this is a popular type of retirement investment account is the flexibility you have with withdrawals. You aren’t penalized for early withdrawals quite like you are a traditional IRA or 401k. However, you can only contribute to this type of retirement plan if your income falls below a certain level – meaning high-earners won’t be able to invest in this type of account.

SEP IRA

Next up we have the SEP IRA. This type of plan is specifically tailored for self-employed people – and the SEP stands for simplified employee pension. Small business owners and freelancers alike utilize this type of retirement account – however, that doesn’t mean you can’t use it if you’re employed by a company. Your specific company just has to have it available for you.

The reason so many employers are starting to offer this type of plan is the low cost and ease of offering. And the main reason employees – or self-employed people – choose to invest in this type of retirement plan is the high contribution limits. You can contribute up to 25% of your net income as a self-employed person. This is what attracts many to choose this option over the traditional IRA or even the Roth IRA.

SIMPLE IRA

Another popular choice is the SIMPLE (Savings Incentive Match Plan) IRA. It’s particularly favored by small business owners due to its low costs and simplified setup process.

With this type of retirement plan, employers must match contributions up to 3%, or provide a nonelective contribution of 2%. This is great for those who can’t afford to save much for retirement – you can technically contribute none of your own money and still earn 2%! Another reason this is a good choice is that contributions are always fully vested – no matter your tenure at the company or when you decide to leave.

Solo 401k

If you consider yourself a solopreneur, you’re likely wondering which of these plans above is right for you. It’s likely that none of them are optimal – instead, the solo 401K is your most advantageous choice.

As the name suggests, these are for business owners with no employees. You’ll also see this type of retirement account referred to as an individual 401k or the one-participant 401k. Here, you can double dip and contribute as both the employee and the employer! But how much can you contribute? In 2022, the limit is set at $20,500 – or $27,000 for those over the age of 50.

Now – here’s where things get interesting. You can then contribute an additional 25% of your income as the employer. With that said, you are limited in what you can contribute overall. The contribution limit is the same as the SEP IRA of $61,000 or $67,500 for those over 50. The main drawback to this type of 401k is the difficulty of getting started. And, you’re limited in terms of investment choices like other 401ks.

Which of the Types of Retirement Investment Accounts is Best for You?

Now that we’ve covered the different types of retirement accounts, which is best for you? Hopefully, you’re able to narrow your options down to just 1-2 choices based on the information provided above. It really comes down to what makes the most sense from a tax and contribution standpoint.

Want to lower your income as much as possible in the present day while really setting yourself up for a lucrative investment lifestyle? Choose a tax-deferred plan with a higher contribution limit. On the other hand, if you expect your tax rate to rise by the time you withdraw your funds for retirement it may make more sense to choose a plan where contributions are taxed as they’re made.

Ultimately, it’s not rocket science – and you don’t need a financial advisor to navigate this process. If you want additional help preparing for your future, we encourage you to read our article covering the best retirement strategies by age.

Or, take a look at our breakdown of the best index funds for retirement if you’re not sure where to put your money within the actual retirement plan you choose. On that note, we want to provide you with a few tips regardless of which type of retirement plan you ultimately end up choosing.

Tips for Managing Your Account – Regardless of Which of the Types of Retirement Plans You Choose

When it comes to managing your retirement accounts, there are a few tips that apply regardless of which type you choose. First, always track the fees associated with your plan – from setup costs to annual fees. They may seem small but they can add up quickly and significantly cut into your returns over time.

Next, review the investment options available within your account regularly. Make sure they’re in line with both your risk tolerance and goals for the account itself. If not, consider looking elsewhere or adjusting them as needed.

Finally, think about leveraging software like VectorVest when selecting the specific investments for your retirement account. It’s designed specifically to help you uncover the best stocks within any retirement account – so you know exactly which ones to buy, when to buy them, and when to sell them. 

We have screeners that pull in the best retirement stocks at any given time – whether you’re simply looking for the safest stocks or the top dividend stocks. Or, learn swing trading to help you with generating retirement income once you exit the workforce for good!

You can take your financial future into your own hands through our stock analyzing software today – so what are you waiting for?

Final Thoughts on the Different Types of Retirement Investment Accounts

That’s everything you need to know about the different types of retirement investment accounts. When it comes to choosing the right type of retirement plan, you have plenty of options. From standard 401ks and traditional IRAs to more specialized plans like the Roth IRA or Solo 401k, and more – there’s something for everyone.

We hope you feel more confident in navigating the process of preparing for your future. If you still haven’t fully begun retirement planning, we encourage you to start now – read our article on what the advantage of investing early for retirement is to understand why.

Or, explore the rest of our retirement blog for more personalized retirement planning advice – like how to invest during retirement, the best asset allocation in retirement, or how to retire on dividends. We have a plethora of resources here at VectorVest to help you make your dream retirement lifestyle a reality!