Understanding Retirement Savings Options

The best time to start saving for retirement is always now. Even if you don’t have much extra room in your budget, retirement savings are so important that the government offers all sorts of tax breaks to encourage you to save up. That way, you’ll have more than just Social Security to live on after you’re done working. 

There are many kinds of retirement savings plans, and the options can feel overwhelming. We can get you started by breaking down the differences in the 2 main types of retirement plans: those you get through your job, and those you open on your own. 

Before you start contributing to an account, it’s important to plan how you’d like to live in your retirement years. Will you downsize? Upsize? Move? Continue to work a little bit, or wake up at noon every day? Let’s start planning. 

Deciding How Much to Contribute

It’s easy to delay retirement savings—after all, there’s always some other need that seems more immediate. Your vision for your non-working years will ultimately determine how much you decide to contribute, but remember: Because of compounding interest, time is on your side. Whatever you can afford now may not be as much as you’d like, but it will turn into much more the earlier you start saving. So, no matter how little, contribute what you can to your employer retirement plan or your IRA. And, when your salary rises, you receive a bonus or pay off a debt, consider increasing your contribution.  

Retirement Checklist

Saving for retirement can be as simple as opening a retirement savings account and setting up a regular deposit into that account. But using this checklist will make it easier for you to get the most out of your retirement money.

Manage Your Budget

• Get financially fit. Pay off debt, cut expenses, create a budget and stick to it.
• Prioritize saving. Compare income to expenses, so you'll know how much you can save. Start saving every month. 
• Pocket windfalls. If you get a tax refund, inheritance or insurance settlement or even win the lottery, set aside most of the money toward retirement and other savings goals.

Create Goals

• Set a short-term target. Decide how much you can save for retirement each month. Remember to increase your retirement contribution each time you get a raise or your financial situation improves.
• Set a long-term target. How much you need in your retirement nest egg depends on individual factors, such as desired lifestyle, how many years you hope to be retired and overall health. 
• Set interim goals. Decide how much you want to have saved by the time you’re 30, 40, 50 and 55. Track how much closer you’re getting to those goals and adjust investment decisions as necessary.

Start Investing

• Use available opportunities, such as employer-sponsored plans and IRAs. While specific accounts vary depending on your employer, your options may include 401(k), 403(b) and 457 plans, or thrift savings plans (TSPs).
• Maximize free money. Take advantage of matching retirement contributions your employer offers, and make sure you contribute enough to get the full match. 
• Increase your contributions. Increase retirement contributions as your pay increases. Consider bumping up your contributions by one percentage point (for example, from 3% to 4%) or more each year. Use any raises you receive as opportunities to increase your retirement savings. 

Employer Plans

As the name suggests, employer-sponsored retirement plans are offered by employers to their employees. There are several different types of plans. The 401(k)—named for the section of the IRS code that governs it—is the most well known. Others include:

• 403(b) plans—offered by school districts and some hospitals 
• 457 plans—offered by state and local governments 
• Thrift savings plans (TSPs)—offered to federal government employees and uniformed servicemembers 

Though the plans differ in their rules, they have a few things in common. Eligible employees can usually make automatic deposits via payroll deduction, up to annual contribution limits. In some cases, employers may offer a matching contribution, which is great because that’s basically free money. Participants have a wide range of investment options, including mutual funds, index funds and annuities. With these plans, there are rules about when and how you can take the money out of the account.

Traditional and Roth Employer-Sponsored Plans

Employers may offer 401(k), 403(b) and 457 plans, plus TSPs in both the traditional form and as so-called “Roth” accounts. For simplicity’s sake, we’ll use traditional and Roth 401(k)s as examples.

The main difference between traditional and Roth plans is the tax treatment of contributions (the money going in) and distributions (the money coming out during retirement).

• With a traditional 401(k), contributions to the account are deducted from your earned income for that year, so you get your tax break now while you’re working. Distributions (withdrawals) from the account during retirement are taxed at whatever your ordinary income tax bracket is at that time.²
• With a Roth 401(k), contributions are made after taxes, so there’s no break for you now. However, distributions during retirement are tax-free,³ which can be a big benefit.

So, which is better? It really depends on your current taxable income and the tax bracket you expect to be in when you retire. You may prefer to have the tax break during your earning years and opt for the traditional plan. Your bracket may be lower once you retire and no longer have a steady paycheck. On the other hand, if you expect a higher tax bracket in retirement, you may want to choose a Roth 401(k). You could also choose to split your contributions between both.

One thing to note about employer-sponsored retirement savings plans is that they’re different from pensions, which some jobs offer but are becoming less common these days. A pension plan pays out to retirees from a common pool of money that the employer is responsible for. In 401(k) and similar plans, the money in the account is just for you.

Considerations	401(k)	Roth 401(k)
Contributions (Deposits)	Deducted from income for that year	No deduction
Tax Advantages	With pre-tax contributions, you don’t pay federal income tax on the amount contributed to the account. Earnings grow tax-deferred, to be paid when withdrawn during retirement.	Earnings grow tax-deferred and are tax-free at distribution, provided certain eligibility qualifications are met.4
Income Limits4	$345,000 Any income above this limit may not be considered when determining eligible employee contributions and employer match.	$345,000 Any income above this limit may not be considered when determining eligible employee contributions and employer match.
Contribution Limits4	$23,000 Catch-up contributions for those age 50 and older are up to an extra $8,000.	$23,000 Catch-up contributions for those age 50 and older are up to an extra $8,000.
Distributions (Withdrawals)	Taxed at ordinary income tax rates. Minimum distributions must begin by April 1 after the year you turn age 73;Footnote 1 otherwise, penalties may apply.	Withdrawals of contributions available when allowed by the plan. Assets subject to minimum distribution rules.5

Your Own Retirement Savings Plan

If you’re self-employed or don’t have a plan at work, you can go to your credit union, bank or brokerage to set up your own retirement savings plan, also known as an Individual Retirement Account or IRA. There are several types of IRAs, but the most widely used are broken down into traditional and Roth IRAs. Like the employer plans above, the difference is that with traditional IRAs, you get the tax deduction when you make the deposit and pay taxes later, while with Roth IRAs, you pay taxes as usual upfront but pay no taxes on any growth within your IRA account.

Considerations	Individual Retirement Account (IRA)	Roth IRA
Contributions (Deposits)	Deducted from income for that year	No deduction
Tax Advantages	Contributions may be tax-deductible.5 Earnings grow tax-deferred, to be paid when withdrawn during retirement.	Earnings grow tax-deferred. At distribution, no federal taxes are due, provided certain qualifications are met.5
Income Limits4	None, but the ability to deduct contributions may be limited if you or your spouse also have an employer-sponsored retirement plan.	Income must be below certain limits, depending on filing status.
Contribution Limits4	$7,000 ($8,000 if age 50 or older)4	$7,000 ($8,000 if age 50 or older)4
Distribution (Withdrawals)	Taxed at ordinary income tax rates. Minimum distributions must start by April 1 after the year you turn age 73,Footnote 1 or penalties will apply.5	Withdrawals of contributions anytime, tax- and penalty-free. Withdrawal of contributions plus earnings at retirement tax- and penalty-free, provided certain conditions are met. No requirement to take distributions during original account holder’s lifetime.5

The Value of Having an Employer-Sponsored and Your Own Plan

It’s a smart move to take advantage of an employer plan—especially if your employer offers a matching contribution. In that case, try to put in at least enough to get the biggest possible employer contribution. Another plus of an employer-sponsored plan is the contribution limits are much higher than those of IRAs, so you can save more than if you had an IRA alone.

Even if you have an employer-sponsored plan, there are several reasons to contribute to an IRA, too:

• You’ve maxed out contributions to your employer-sponsored plan and want to save even more with tax breaks.
• Your employer offers a traditional but not a Roth plan, and you’d like to open a Roth IRA for tax reasons.
• Your employer’s plan has limited investment choices, and you’d like the greater flexibility of an IRA.
• You’re the non-earning spouse of an income earner and would like to start saving for your own retirement.