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Retirement Accounts: What You Need to Know

Saving for retirement can be confusing and overwhelming. There are many different types of retirement accounts, each with their own rules, limits, and eligibility requirements. But don’t worry, I’m here to help you sort it all out. Here are some of the most common types of retirement accounts and what they mean for you.

IRA

An IRA (Individual Retirement Account) is a retirement account that you can open and contribute to on your own, no matter what your job situation is. You can choose from a variety of investments within your IRA, such as stocks, bonds, mutual funds, and more. The annual contribution limit for IRAs in 2023 is $6,000, or $7,000 if you are 50 or older. The catch-up contribution limits for will increase by $10,000 for people who are 62, 63, or 64 years old in 2023 . This means you can save more money for your retirement if you are in this age group.

There are two main types of IRAs: traditional and Roth. The main difference between them is how they are taxed.

  • Traditional IRA: You can deduct your contributions from your taxable income in the year you make them, which lowers your tax bill. However, you will have to pay income tax on your withdrawals in retirement. You also have to start taking required minimum distributions (RMDs) from your traditional IRA when you reach age 73. This age will increase to 75 by 2033. Think of it as a deferred tax account.
  • Roth IRA: You cannot deduct your contributions from your taxable income, which means you pay tax on them upfront. However, you can withdraw your money tax-free in retirement, as long as you meet certain rules. You also do not have to take RMDs from your Roth IRA. This means you can let your money grow longer and pass it on to your heirs without tax consequences. Think of it as a prepaid tax account.

401(k)

A 401(k) is a retirement account that is offered by some employers as a perk to their employees. You can contribute a portion of your pre-tax salary to your 401(k), up to a certain limit. The annual contribution limit for 401(k)s in 2023 is $20,500, or $27,000 if you are 50 or older. The catch-up contribution limits for will increase by $10,000 for people who are 62, 63, or 64 years old in 2023 . This means you can save more money for your retirement if you are in this age group. Some employers may also match some or all of your contributions, which is basically free money for your retirement.

Your 401(k) investments are typically limited to a selection of funds chosen by your employer or plan provider. You do not pay tax on your contributions or earnings until you withdraw them in retirement. You also have to start taking RMDs from your 401(k) when you reach age 73. This age will increase to 75 by 2033.

There are also two types of 401(k)s: traditional and Roth. The main difference between them is how they are taxed.

  • Traditional 401(k): Your contributions are deducted from your taxable income in the year you make them, which lowers your tax bill. However, you will have to pay income tax on your withdrawals in retirement.
  • Roth 401(k): Your contributions are not deducted from your taxable income, which means you pay tax on them upfront. However, you can withdraw your money tax-free in retirement, as long as you meet certain rules.

Roth 401(k)

A Roth 401(k) is a type of 401(k) that allows you to make after-tax contributions and enjoy tax-free withdrawals in retirement. It combines the best of both worlds: a Roth IRA and a traditional 401(k). The contribution limits and employer matching rules are the same as for a traditional 401(k). However, unlike a traditional 401(k), you do not have to pay tax on your withdrawals in retirement, you have held the account for at least five years and are at least 59 and a half years old.

One of the advantages of a Roth 401(k) is that it does not have the income limits that apply to a Roth IRA. This means that anyone who is eligible for a 401(k) can also contribute to a Roth 401(k), no matter how much they earn. Another advantage starting in 2024 is that you also do not have to start taking RMDs from your Roth 401(k)s when you reach a certain age, unlike traditional 401(k)s. This means you can let your money grow longer and pass it on to your heirs without tax consequences. However, you still have to take RMDs for earlier years if you were required to do so. For example, if you turn 73 in 2023, you still have to take your first RMD by April 1, 2024.

403(b)

A 403(b) is a retirement account that is similar to a 401(k), but it is only available to employees of certain non-profit organizations, such as schools, hospitals, churches, and charities. You can contribute a portion of your pre-tax salary to your 403(b), up to a certain limit. The annual contribution limit for 403(b)s in 2023 is $20,500, or $27,000 if you are 50 or older. The catch-up contribution limits for will increase by $10,000 for people who are 62, 63, or 64 years old in 2023 . This means you can save more money for your retirement if you are in this age group. Some employers may also match some or all of your contributions.

Your 403(b) investments are typically limited to annuities and mutual funds. You do not pay tax on your contributions or earnings until you withdraw them in retirement. You also have to start taking RMDs from your 403(b) when you reach age 73. This age will increase to 75 by 2033.

Some 403(b) plans may also offer a Roth option, which allows you to make after-tax contributions and enjoy tax-free withdrawals in retirement. The contribution limits and employer matching rules are the same as for a traditional 403(b). However, unlike a traditional 403(b), you do not have to pay tax on your withdrawals in retirement, you have held the account for at least five years and are at least 59 and a half years old.

SEP IRA

A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a retirement account that is designed for self-employed individuals and small business owners. It allows you to make tax-deductible contributions to your own and your employees’ retirement accounts, up to a certain limit. The annual contribution limit for SEP IRAs in 2023 is 25% of your net self-employment income or $61,000, whichever is less. This is a great option to start a retirement plan for freelancers or those of you with a side-hustle.

Your SEP IRA investments are similar to those of a traditional IRA. You can choose from a variety of investments within your SEP IRA, such as stocks, bonds, mutual funds, and more. You do not pay tax on your contributions or earnings until you withdraw them in retirement. You also have to start taking RMDs from your SEP IRA when you reach age 73. This age will increase to 75 by 2033.

One of the advantages of a SEP IRA is that it is easy to set up and maintain. You do not have to file any annual reports or forms with the IRS, unless you have employees. Another advantage is that you can vary your contributions from year to year, depending on your income and cash flow.

Solo 401(k)

A solo 401(k) is a retirement account that is similar to a 401(k), but it is only available to self-employed individuals and business owners who have no employees other than themselves and their spouses. It allows you to make both pre-tax and after-tax contributions to your retirement account, up to a certain limit. The annual contribution limit for solo 401(k)s in 2023 is $58,000, or $64,500 if you are 50 or older.

Your solo 401(k) investments are similar to those of a traditional 401(k). You can choose from a variety of investments within your solo 401(k), such as stocks, bonds, mutual funds, and more. You do not pay tax on your pre-tax contributions or earnings until you withdraw them in retirement. You also have to start taking RMDs from your solo 401(k) when you reach age 73. This age will increase to 75 by 2033.

There are also two types of solo 401(k)s: traditional and Roth. The main difference between them is how they are taxed.

  • Traditional solo 401(k): Your pre-tax contributions are deducted from your taxable income in the year you make them, which lowers your tax bill. However, you will have to pay income tax on your withdrawals in retirement.
  • Roth solo 401(k): Your after-tax contributions are not deducted from your taxable income, which means you pay tax on them upfront. However, you can withdraw your money tax-free in retirement, as long you do not have to pay tax on your withdrawals in retirement, you have held the account for at least five years and are at least 59 and a half years old. Starting in 2024 is that you also do not have to start taking RMDs from your Roth 401(k)s when you reach a certain age. However, you still have to take RMDs for earlier years if you were required to do so. For example, if you turn 73 in 2023, you still have to take your first RMD by April 1, 2024.

One of the advantages of a solo 401(k) is that it allows you to make larger contributions than a SEP IRA or a traditional IRA. This is because you can contribute as both an employer and an employee to your solo 401(k). Another advantage is that you can take a loan from your solo 401(k), up to $50,000 or 50% of your account balance, whichever is less.