401k(s), Roth IRAs & More: Which Retirement Plan Should I Choose?

Learning about different types of retirement plans can feel like reading a book in a foreign language. Why does it have to be confusing? Here’s a quick guide to introduce the basic pros and cons of the most popular retirement plan types.

Save Smart With A 401(k) Retirement Plan.

A 401(k) is a popular employer-sponsored retirement plan where you can save and invest a piece of your paycheck before taxes are taken out (pre-tax). If you are self-employed or own a business with no employees, you can choose to open a self-employed 401(k). There are also Roth 401(k)s, which are good solutions for some people depending on their current and future tax bracket.

  • Pros: If your job offers a 401(k) with a match, it’s like getting free money for your future. We always recommend maxing out the match if you’re able. Plus, you save on taxes now, making it a smart choice for many workers.
  • Cons: You can only choose from the investment options provided, and taking money out before you retire can lead to high penalties and taxes.

401(k)s are a defined contribution plan. This is a term you’ll see a lot when researching retirement plans. This is just an umbrella term for any retirement plan in which you and sometimes your employer contribute money on a regular basis.

Traditional & Roth IRAs Offer The Greatest Flexibility.

IRAs are all about giving you options. Whether you choose a Traditional IRA (save on taxes now) or a Roth IRA (save on taxes later), you’ll have the flexibility to pick investments that match your goals.

  • Pros: IRAs are great if you want more control over your investments or don’t have a 401(k) option at work. You can even open an IRA on top of your 401(k)! Another major advantage of a Roth IRA is you’re not forced to withdraw at a certain age.
  • Cons: There are yearly limits on how much you can contribute, and if you make too much money, you can’t contribute to a Roth IRA at all. You also can’t get a tax deduction for a traditional IRA if you make above a certain amount.

403(b) & 457(b) Are For State & Local Government, Public School Employees, Charities & Some Churches.

The 403(b) and 457(b) retirement plans are accounts designed for people who work for a state or local government, a public school, a charity or some churches. The main differences are who they’re for and the rules about when you can withdraw the money.  Roth options may also be available in these plans.

  • Pros: Both types of plans allow employees to save money for retirement by putting part of their paycheck into an account before taxes are taken out—just like some 401(k) and Roth options. This can help lower your taxes now and grow your retirement savings for the future.
  • Cons: You may be unable to invest in what you want since your options are limited to the plan’s investment choices.

SIMPLE & SEP IRAs Are Great For Small Business Owners & Employees.

401(k)s are great but sometimes higher administrative fees. Two alternate options for small business owners and their employees are SIMPLE & SEP (Simplified Employee Pension) IRAs.

  • Pros: Both plans have significantly lower administrative fees than 401(k)s, making them more cost-effective for employers. They are also easier to set up and maintain, which can be a big relief for businesses without large HR departments. As such, offering these plans can help small businesses compete with larger companies in attracting and retaining talent by offering solid retirement benefits.
  • Cons: While generous, the contribution limits for SIMPLE and SEP IRAs are generally lower than those for 401(k) plans, potentially limiting how much can be saved for retirement. The SEP IRA also offers less flexibility because contributions are solely employer-funded, which means employees can’t contribute directly from their paychecks.
financial planners sitting at a table discussing retirement plans.

Hess’s Team Can Help Determine The Best Retirement Plan For You.

Picking the right retirement plan comes down to your job, how much you earn, and how you want to manage your savings. The best plan is the one that gets you excited about saving for your future. Let’s review your options—schedule a free consultation with a Hess Financial CERTIFIED FINANCIAL PLANNER™ in Harrisonburg today.

Disclaimer: This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.