MoneyLife

How Do I Choose the Right Retirement Account?

By Anna Yen
retirement account

It’s never too early or too late to save toward your retirement. Based on your goals, choosing the best strategy for your future may involve a mix of savings and retirement accounts. Knowing which plan is best for you can be greatly influenced by how much savings you want to build up and when you plan to retire.  

What should I look for when choosing a retirement plan?

Choosing the best retirement plan depends on your personal and financial situation. To help you navigate through the different retirement plans offered, here is a comparison of the main types of accounts available.

Here’s a handy comparison of the main types of retirement accounts:

Retirement Account TypeHow it worksMaximum annual contributionEarly withdrawal penaltyNeed to know
401(k)Opened via your employer, account earnings aren’t taxed until withdrawal at retirement$19,500 in 202110% if younger than 59 1/2Investment choices could be limited, but if your employer offers matching on your contributions, their contributions are essentially free money
Roth 401(k)A separate part of your 401(k), must be accounted for individuallyRoth contributions count toward the $19,500 limit10% if younger than 59 1/2, must hold the account for 5 yearsLike a “reverse” 401(k), contributions are made with after-tax money, but distributions aren’t taxable
Roth 403(b)Tax-deferred pension strictly limited to employees of schools, churches, and charitable entities exempt under Section 501(c)(3).$19,500 in 2021. Employees aged 50 years or older may make catch-up contributions of $6,500.10% if younger than 59 ½, but exceptions exist for some to start at 55This account has higher limits for matches than 401(k)
Traditional IRASmall-business owners and self-employed can use this tax-deferred plan$6,000 in 202110% if younger than 59 ½. Mandatory withdrawals at 72 are retirement are taxedContributions may be partially or fully deductible.
Roth IRAContributions aren’t tax-deductible, but withdrawals at retirement don’t get taxed$6,000 in 2021 (or $7,000 is you are at least 50 years old)None if 59 ½; unlike traditional IRA, distributions at 72 aren’t mandatoryBoth traditional IRA and 401(k) accounts can be rolled over into Roth IRA plans
SEP IRAThis plan lets employers, including self-employed, make tax-deductible contributions to employee accounts(By employers) the lesser of 25% of employee’s compensation or $58,000 in 2021. Employees don’t contribute under this plan.None if 59 ½Flexible contributions help if the business has a volatile cash flow
Simple IRALike a 401(k) for small business owners, employees can contribute and get matching funds(By employers) mandatory matching of 3% of compensation, or fixed contribution of 2% of compensation, up to $5,800None if 59 ½Contribution limits are lower than 401(k)s but offers easy set-up and lower administrative costs

How many retirement accounts should you have?

Is it better to have one or two retirement accounts? While you can have multiple retirement accounts, it may be easier to consolidate your accounts. Plus, if you have several retirement accounts, it can be challenging to stay on top of eligibility, income, and contribution requirements. Additionally, fewer accounts may also mean lower administrative fees. 

Having multiple accounts may make sense under certain circumstances. If you have a retirement account that charges a low administrative fee, you may be better off leaving your investment where it is. 

You may also choose a mix of accounts that offer different levels of flexibility. Consider 401(k) alternatives like adding a Roth IRA, which doesn’t require the mandatory withdrawal of funds when you hit 72 years old. Or supplement your savings by adding Safety Net to your MoneyLion account. Safety Net allows you to quickly see the amount of money and assets you have available at MoneyLion, including RoarMoneySM, InstacashSM, and investment accounts. 

Which retirement account should I use first?

Developing a retirement strategy is rarely a one-size-fits-all approach. When choosing the best retirement account, there are many factors to consider. Fees, flexibility, how much money to save, and withdrawing money from your retirement account all play a role. You may also consider other details when choosing your retirement account, such as:  

Contributions 

If you have access to a 401K, Roth 401K, or a 403B plan, you can contribute up to $19,500 in 2021. If you are older or just trying to put aside as much money as you can toward your retirement, these may be good options. 

If you’re trying to figure out the difference between a 401(a) vs 401(k), 401(a)s are offered by public employers and NGOs, while 401(k)s are offered by private employers. 

Tax bracket

The tax impact of your plan and contributions can play a large role in choosing which retirement account is best for you.  

  • After-tax contributions: If you expect to be in a higher tax bracket when you retire, a tax free retirement account like the Roth 401K or Roth IRA may be a good fit. While you pay taxes when you make your contributions, you can pull your money out tax-free upon retirement.  
  • Pre-tax contributions: Conversely, deferred taxes on contributions to a traditional 401K or IRA may be a better choice if you expect to be in a lower bracket when you retire. You will pay taxes on the amounts paid when you retire, but at a lower rate. Plus, you may be able to integrate other tax planning strategies to reduce your tax burden.  

Self-employed / small business

With a SEP-IRA account, self-employed individuals or small business owners can set aside the lesser of 25% of their income or $58,000. Depending on the amount of money you earn, this can be significantly more than what can be contributed under a traditional IRA. 

Start saving for your future with a MoneyLion investment account. Our personalized portfolio feature matches your appetite for risk with your savings goals. Automatic investing makes it easy to start putting funds aside. With zero management fees and no minimum balance, you can start saving for your retirement today. 

Use MoneyLion to Plan for the Future

With a range of retirement options, anyone can start saving for the future. However, knowing which account is best for you depends on your future financial goals. Mixing your retirement accounts with a robust investment strategy gives you added security when you retire.  With no management fees or minimum balance requirements, it’s easy to save for your future with a MoneyLion Investment Account. You choose the best investment strategy for you. Set up a MoneyLion Investment Account and watch your money grow.

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