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Understanding retirement accounts
Key Points
- Plan for a retirement that could last longer than your career.
- An employer-sponsored plan may be the foundation of your retirement savings.
- You'll likely need more than one type of account to save for retirement.
There are many types of accounts that can help you save for a lengthy retirement — and most people rely on more than one account to reach their retirement goals. Understanding the features and benefits of each will make it easier to choose the right ones.
Employer-sponsored plans with employee contributions
A good starting point for retirement saving is your employer-sponsored plan. Employer plans usually accept automatic contributions from your paycheck, and the money you contribute has the potential to grow tax deferred (or tax free for qualifying Roth contributions).
In addition, if your employer offers to match your plan contributions, you should consider taking full advantage of this opportunity. An employer match will supplement your savings without any extra effort on your part. If you're not sure if you have an employer match, you can ask your HR or benefits department for your employer summary plan description.
|
401(k) plan |
403(b) plan |
Governmental 457(b) |
SIMPLE IRA |
|
|---|---|---|---|---|
| Which type of employer can offer the plan? | For-profit or nonprofit organizations | 501(c)(3) nonprofit organizations and public schools | Any state or local government entity | For-profit, nonprofit or government organizations with fewer than 100 employees |
| Who is eligible to participate? (Some employers may be less restrictive) | Employees age 21 or above, with at least one year of service (1000 hours). Part time employees with 3 years of service (500 hours per year) starting in 2024 | Generally, all employees are eligible | Eligibility is generally at the employer's discretion | Employees with at least $5,000 of compensation in any two previous years of service and who anticipate compensation of at least $5,000 in the current year |
| How much of your salary can you contribute for 2023? | $22,500, or $30,000 if you are age 50 or above | $22,500, or $30,000 if you are age 50 or above (additional catch-up contributions may also be available) | $22,500, or $30,000 if you are age 50 or above (additional catch-up contributions may also be available) | $15,500, or $19,000 if you are age 50 or above |
| Additional considerations |
May have a loan provision Roth 401(k) contributions may be allowed Employer match may be available 10% IRS penalty on early withdrawals (exceptions apply) |
May have a loan provision Roth 403(b) contributions may be allowed Employer match may be available 10% IRS penalty on early withdrawals (exceptions apply) |
May have a loan provision Roth 457 contributions may be allowed Employer match may be available No penalty on early withdrawals |
No loan provision Roth contributions may be allowed but most providers don’t yet have the capability Additional employer contributions required 25% penalty on early withdrawals for the first two years, 10% penalty thereafter (exceptions apply) |
Pretax vs. Roth deferrals
Some employer plans offer you the option to make Roth contributions instead of the standard pretax contribution to your account. Determining which contribution option to choose depends in part on your tax bracket now and in retirement, in addition to the amount of time you have before you retire.
- Pretax contribution. When you make a pretax contribution to a retirement plan, you receive a tax benefit right away, but you will have to pay taxes on the money when you withdraw it. In general, a person in a higher tax bracket who anticipates being in a lower tax bracket at retirement may find a pretax deferral more favorable.
- Roth contribution. You won't receive a current tax benefit, but qualified distributions are tax free in retirement. In general, a person in a lower tax bracket who anticipates being in a higher tax bracket in retirement may find a Roth contribution more favorable.
There are other factors to consider as well so be sure to talk with your Ameriprise financial advisor and tax professional before making a decision.
Employer-funded plans
Some employers offer plans where all eligible employees automatically benefit, without having to make contributions from their salary. Even though you do not need to personally contribute to these plans, you'll still need to select beneficiaries, may need to choose the investments and will want to factor them into your overall plan for retirement.
|
|
Profit sharing |
SEP |
Pension/defined benefit |
|---|---|---|---|
| Which type of employer can offer this plan? | Primarily for-profit organizations, though nonprofits and government employers may also establish | For-profit, nonprofit or government organizations | For-profit, nonprofit or government organizations |
| Who is eligible to participate? (Some employers may be less restrictive) | Employees with two years and at least 1,000 hours of service per year, if there is immediate vesting (with a vesting schedule, one year and 1,000 hours of service) | Employees age 21 or above who perform service in at least three of the prior five plan years, and who receive at least a required minimum amount of compensation in the current year ($750 in 2023) | Employees with one year and 1,000 hours of service |
| What is the maximum that can be contributed for 2023? | 100% of compensation, up to $66,000 (employer's deduction is capped at 25% of eligible payroll) | 25% of compensation, up to $66,000 | Contributions must not exceed the amount required to fund the maximum annual benefit (For 2023, the lesser of $265,000 or 100% of average compensation for highest three consecutive years) |
| Additional features |
Loans may be available May have a vesting schedule Employer contributions are discretionary Employee typically directs investments |
No loan provisions Immediate vesting Employer contributions are discretionary Employee always directs investments |
Loans are allowed but typically not available May have a vesting schedule Employer contributions are mandatory Employer directs investments |
Individual retirement accounts (IRAs)
If you're already participating in an employer-sponsored plan but are able to save more, or if you don't have access to an employer plan, you should consider contributing to an IRA. IRAs allow you to hold a wide variety of investment and offer different tax benefits depending on your income level and the type of IRA you select.
Traditional IRAs can offer a particular tax advantage if you expect to be in a lower tax bracket when you retire. If you qualify for pretax contributions, your current taxes may be reduced and the taxes you pay when you withdraw the money may be less than you would pay now. However, as you consider a traditional IRA, keep in mind that at age 73 you must take required minimum distributions (RMDs).
A Roth IRA may be an advantageous way for you to invest if you are in a lower tax bracket, especially if you anticipate being in a higher tax bracket in retirement. The earnings in your Roth IRA are tax free upon withdrawal (if certain requirements are met). This can be a powerful advantage. Assuming that you expect your tax bracket to be higher in retirement than it is now, there may be a significant benefit to giving up the current tax deduction and making do with less today in order to gain the tax-free growth and withdrawal.
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|
Traditional IRA |
Roth IRA |
|---|---|---|
| Who is eligible to make contributions? |
Individuals of any age with earned income Nonworking spouses of individuals with earned income |
Individuals of any age with earned income (subject to modified adjusted gross income limits) Nonworking spouses of individuals with earned income (subject to modified adjusted gross income limits) |
| What is the maximum you can contribute for 2023? (Limits apply to combined Traditional and Roth contributions) | Lesser of $6,500 ($7,500 if you are age 50 or above) or 100% of earned income | Lesser of $6,500 ($7,500 if you are age 50 or above) or 100% of earned income |
| How are contributions and distributions (withdrawals) taxed? |
Contributions may be tax deductible, depending on whether or not you or your spouse have a retirement plan at work and your modified adjusted gross income. Any growth from contributions will be tax deferred until withdrawn. Distributions of pretax contributions and earnings are taxed at your ordinary income tax rate, but are not subject to the 3.8% tax on net investment income. |
Contributions are nondeductible. Earnings are income tax and penalty free if: Distributed five years or more from the first day of the first year that funds were first contributed or converted to any Roth IRA for the individual, and At least one of the following applies: age 59½, death, disability, first-time home purchase (up to $10,000). |
| Additional considerations |
Required minimum distributions beginning at age 73. Distributions to an individual who has nondeductible contributions in any of his or her IRAs will consist of taxable and nontaxable amounts on a pro rata basis. Distributions of taxable amounts prior to age 59½ are subject to a 10% IRS penalty (exceptions apply). |
No required minimum distributions.1 Contributions are distributed first and are always nontaxable. Early withdrawals of earnings may be subject to tax and a 10% IRS penalty if distributed prior to age 59½ (exceptions apply). |
More ways to save
While employer-sponsored plans and IRAs offer important opportunities for retirement savings, they may not be enough to provide the retirement you want. Personal savings will likely play a critical role in funding your retirement as well. It is important to think about all of the vehicles available as you plan for a secure retirement.
Take the next step
An Ameriprise financial advisor can help identify which accounts are right for you, and allocate investments to each account. As your needs and circumstances change over time, your financial advisor will adjust your plan to help ensure you stay on track.