Choosing the right retirement account

By MoneyLion

Now that we’ve tried convincing you to start thinking about retirement, it might be time to take the next step and consider opening an account to begin saving for the day when you stop working.

Your first step is to consider which of the various types of retirement accounts is the best fit for you. This can seem overwhelming at first, with all of the jargon and acronyms like 401(k), IRA, SEP, and more that you encounter at first.

But the main differences generally relate to:

  1. whether your account is funded through your employer,
  2. what’s the maximum you can contribute each year, and
  3. how your contributions are taxed.

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$18,000 in 201610% if younger than 59 1/2Investment choices could be limited, but if your employer offers matching on your contributions, it’s free money
Roth 401(k)A separate part of your 401(k), it must be accounted for individuallyRoth contributions count toward $18,000 limit10% if younger than 59 1/2, must hold account for 5 yearsLike a “reverse” 401(k), contributions are made with after-tax money, but distributions aren’t taxable
Roth 403(b)Strictly limited to employees of schools and non-profits$18,000 in 201610% 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$5,500 in 201610% if younger than 59 ½. Withdrawals at 70 1/2 are retirement are taxedYou may get more investment options and be able to use your current bank or brokerage as plan provider
Roth IRAContributions aren’t tax-deductible, but withdrawals at retirement don’t get taxed$5,500 in 2016None if 59 ½; unlike traditional IRA, distributions at 70 ½ 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 $53,000 in 2016. Employees don’t contributeNone if 59 ½Flexible contributions help if business has volatile cash flow
Simple IRALike a 401(k) for small business owners, employees can contribute and get matching get matching funds(By employers) mandatory matching of 3% of compensation, or fixed contribution of 2% of compensation, up to $5,100None if 59 ½Contribution limits are lower than 401(k)s, but offers easy set-up and lower administrative costs
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