There are so many retirement plan options out there today, but they don’t all apply to each of us. It can be hard to weed through them all. So how do you know what may work for you?
This article could make sorting through your choices and learning about contribution limits easier.
We’ll go through a number of retirement plan options for employees, for self-employed folks / contractors, for government employees, and for those in the military. We will also mention the plans that could work for anyone, in any career.
The Main Retirement Plan Options and Contribution Limits
- Almost anyone
- Qualifying employees of large companies or small businesses
- State or local government employees, plus employees of non-profits
- Teachers & ministers
- Self-employed / contractors
- Military members
Be sure to read the one(s) that may apply to you, and check with a pro and your employer (if you have one) to be sure. You can click the links above if you want to jump straight to one of the categories.
Retirement Plan Options That Work for Most People
Quite a few of the plans we’ll talk about here are available in the government sector or through an employer. But there are some that most anyone can use, so let’s start out with those: IRAs.
IRA stands for Individual Retirement Arrangement. It’s up to you what you save or invest in within the IRA. You can open an IRA at most any brokerage (for example, Vanguard), roboadvisor, bank, or self-directed custodian. Be sure to check for any fees, and make sure they offer the types of investments you are looking for.
In order to put money in an IRA, you or your spouse just need to have have earned income for the tax year you are putting the money in for. Your child may even be able to use an IRA too, if they have earned income. (For example, using a Roth IRA for kids.)
You can have both a Roth and a Traditional IRA, and put money into each of them for the same year if you want. We’ll talk about the two types of IRAs that apply to almost anyone shortly, but first let’s go over the contribution limits.
Traditional & Roth IRA Contribution Limits
These contribution limits are total contribution limits for the year, not per type of IRA. So for example, you could contribute up to $3,000 to a Roth IRA and up to $3,000 to a Traditional IRA for a total of up to $6,000 if you are under age 50. If you’re age 50+, you can do an extra $1000 as a catch-up.
There used to be a rule that you had to stop contributing to your Traditional IRA starting the year you reached age 70½, but for tax years beginning after December 31, 2019 that rule has been repealed.
Opening a Traditional IRA is a Great Way to get Potential Tax Write-offs
A Traditional IRA is an account that you contribute to pre-tax, so you may get a taxable income tax break. But, if your spouse has retirement plan options at their place of employment and you make over a certain amount jointly per year, then your tax deduction for it may be nothing.
Generally, none of the contributions or earnings are taxed until you take them out. So just remember that these withdrawals will count as taxable income for the year when you take them.
Speaking of taking money out, you might be wondering when you can withdraw from your IRA. You can do so whenever you want, but be warned that if you are under age 59 1/2 you will also have to pay an extra 10% tax on it unless you meet certain exceptions. So it’s best to leave the money there for retirement if you can!
What about the IRA withdrawal age? If you use a traditional IRA you will have to start taking minimum amounts out at age 70 1/2 if you turned that age before December 31, 2019. After that the IRA withdrawal age is at age 72 due to the SECURE act.
One of the biggest perks, besides the potential tax write-off, of putting money in a traditional IRA is that you can use money to pay for qualified college expenses. Another great perk is that if you qualify, you may be able to use up to $10,000 towards a first home purchase. For both of these perks, you won’t have to pay the early distribution penalty, but you will still have to pay the taxes on them. This is due to the fact that the money you put in was pre-tax money to begin with.
A Roth IRA will get you Tax Free Withdrawals
A Roth IRA retirement account is very similar to a traditional IRA, with one major difference. All of the money contributed comes from after-tax money, instead of pre-tax. This means that you will not get any tax write-offs for your contributions to it.
However, it also means that you won’t pay taxes on any of the money you take out during retirement, as long as you make qualified withdrawals. (Basically, as long as you follow the rules.)
In some cases, taking money from your Roth can be without penalty. These cases are if you:
- Have qualified educational expenses
- Buy, build or rebuild a first home
- Certain natural disasters
- Medical expenses over 7.5% of your adjusted gross income
- Totally and permanently disabled
- Medical insurance premiums while unemployed
- IRS levy
- Qualified reservist
Check with the IRS and your tax person to make sure your case won’t have a penalty.
There are also no required minimum distributions or IRA withdrawal age for this type of account, so you can continue earning until you need to take money out. Another great perk is that you can continue to put money in your Roth IRA as long as you live and continue racking up earnings. I love this!
Are You a W-2 Employee? You May Be Able to Use These Plans:
If you are an employee at a company that offers retirement plan options, then you may be able to use the types of 401k plans listed below. Previously these were available for full time employees, but thanks to the passage of the SECURE act (which stands for “Setting Every Community Up for Retirement Enhancement”) part time employees may be able to use them too. Starting with tax year 2020, part time employees who work 1000 hours in one full year or three consecutive years of at least 500 hours can participate too.
- Traditional/Pre-Tax 401k (often just called a 401k retirement plan)
- Roth 401k
- SIMPLE 401k
Large companies or small businesses usually offer one or more of these kinds of plans for employees. We explain each of them in more detail below. Check with your benefits person to find out more or to sign up if you qualify, and then get started. Signing up is usually very easy.
(If you work for yourself, for a school, church, or government, or are in the military, there are other plans that could work for you. The same is true if you don’t earn an income, but your spouse does, or if you want to use more than one type of plan.)
Types of 401k Plans
There are two types of 401(k) plans that are usually offered by larger companies: a traditional/pre-tax 401k and a Roth 401k. In both cases, the company will deduct contributions out of your paycheck for you, although when they do it is different.
There’s also a third type of 401k that companies with 100 or fewer employees can choose to offer instead: a SIMPLE 401k plan. (If you’re curious, SIMPLE stands for Savings Incentive Match PLan for Employees.) More on that later.
There are no income limits for having a 401k.
401k Retirement Plans Can Get You FREE Money
Free money is usually one of the big benefits of a 401k. That’s because company sponsored 401(k) plans may match the money you put in up to a certain percentage.
Many companies will match up to 3% of your salary dollar for dollar, if you are full time and put in at least 3%. Everything you contribute over that amount, they may or may not match.
Except in the case of a SIMPLE 401k where you are always 100% vested, companies may have different vesting schedules. When you are fully vested, it means you have the right to all of the free money the company put in as their match. (You always have the right to all of the money you put in.)
It is smart to put in at least up to the amount the company is willing to match into a 401k if possible. If you don’t, you are just throwing away free money, which is not good.
Every company is different, and can offer different matches, so check with your plan manager to see what they do.
401k Contribution Limits
Traditional pre-tax 401k and Roth 401k annual limits for contributions (elective deferrals) are shown above. (But they also can’t be more than 100% of your compensation.)
If you have both a traditional 401k and a Roth 401k, the combined 401k contribution limit is the same. The total can just be split between them in whatever way you want.
So for example, if you are 40 years old, for 2022 you could put $10,500 in a Roth 401k and $10,000 in a traditional 401k. Or $17,000 in the Roth 401k and $3,500 in the traditional, etc.
The split is up to you as long as the total doesn’t go over the total limit (or the amount you make if that’s less than the limit.)
Note that a Roth 401k is not the same as a Roth IRA (which we talk about later.) They’re just both named after Senator William Roth.
In any case, as per most retirement plans, you cannot contribute more than your annual salary into a 401(k).
Benefits & Things to Be Aware of With a Traditional Pre-Tax 401k Retirement Plan
When you use a traditional/pre-tax 401k, the money you put into it is taken out of your check before taxes. This helps make your current annual taxable income less, which could save you some money when you file your taxes. But that will all depend on your exact situation, so check with your tax advisor.
There are a few things know when putting money in a traditional pre-tax 401(k) plan. First and foremost is that all of the money you put in, and all of the money you earn in it, is taxable when you take it out. And you or your beneficiaries do have to take money out of it someday, often either:
- after you retire
- when you reach the age for Required Minimum Distributions (RMDs)
- or within a certain amount of time after your death
So the withdrawals are taxable income at that point.
(See the IRS and your plan’s rules for details about required minimum distributions. Prior to 2020, the age was 70 1/2. For people who turned 70 1/2 after December 31, 2019 the RMD age increased to 72. For beneficiaries, starting in 2020 all distributions will usually need to be made within 10 years of the participant’s death, although there are some exceptions.)
Also, taking any money out prior to the age of 59 ½, will give you a 10% early withdrawal penalty. This is on top of having to pay typical taxes on the money. Since this could be a pretty big fine, think seriously about it before taking money out.
What About a Roth 401k Retirement Plan?
Not as many companies offer these, but they are becoming more common. When you use a Roth 401k, the money you put into it is taken from your check after taxes. So the money you add is considered part of your current annual taxable income.
This won’t save you some money when you file your taxes, but it might save you money later on. (Whether or not it does will depend on your exact situation, both now and in the future.)
The big benefit to a Roth 401k though is that any earnings grow tax free. That could be huge, if your investments have grown.
Again though, taking money out before you are allowed to will give you a 10% early withdrawal penalty. And like the traditional pre-tax 401k, you do have to take money out of your Roth 401k someday, often either after you retire or after you turn reach the required age.
Finally, note that if your employer matches contributions, their match will go into a traditional 401k even if you have set up a 401k Roth. (So you’ll have two kinds of 401k plans if you use a Roth 401k and they give you a match.)
Finally, What About Using a SIMPLE 401(k) if You Work for a Small Business?
If you work for a smaller company that has 100 employees or less, they may offer you a SIMPLE 401(k) instead of a traditional pre-tax 401k or a Roth 401k. A SIMPLE 401k is similar to a pre-tax 401(k) in some ways, but it’s meant for smaller businesses and has different employee contribution limits.
SIMPLE 401k Contribution Limits
As you can see, SIMPLE 401k employee contribution limits are a little lower than the other 401k plans.
Your employer must do one of these two things if they offer a SIMPLE 401(k):
- Provide a matching contribution for up to 3% of your salary, OR
- Contribute a flat 2% of your salary
So basically, they will either match up to 3% of contributions, or they will put up to 2% of your salary in even if you don’t contribute to the plan. And you are totally vested in any and all contributions.
Government Employees & Nonprofit Employees
Government employee retirement plan options may be different than regular full time employees elsewhere. This is due to the fact that government employees are eligible for special plans that may have more benefits.
The 457(b) Retirement Plan can be a Great Option for Government Employees
A 457(b) retirement plan is geared towards state and local government, as well as some non-profit groups and civil servants. Some of these include:
- civil servants
- police officers
- high level executives at some non-profit hospitals
- high level executives at certain non-profit charities
- employees of government unions
Check with your workplace to find out if they offer a 457(b).
A 457(b) is similar to a 401(k) or 403(b) plan, in that you make pre-tax contributions. The main difference between the 457(b) plan and the other two is the withdrawal requirement. If you leave your job, or retire, prior to reaching the age of 59 ½, you MUST withdraw your funds from this account. However, you will not have the standard 10% penalty for doing so.
This is the key factor that makes this sort of account so appealing to a lot of government workers.
Here are the standard 457(b) contribution limits:
457(b) Contribution Limits
While that is the standard, some 457(b) plans have even better catch-up contribution limits if you are within 3 years of retiring. This is called a last 3-year catch-up.
That allows you to contribute either twice the annual 457(b) limit OR the annual 457(b) limit, plus amounts allowed in prior years that you didn’t contribute.
So for example say your company is one of those, and you go with the twice the annual limit rule. In that case you could possibly put in up to $41,000 per year for 2022 instead, or $39,000 per year for 2021 and 2020.
Some 457(b) plans may also let you make larger catch-ups if you have at least 15 years of service with the same employer. This is called the 15-year rule.
The catch-up contribution rules around a 457(b) are pretty complicated, to say the least. Even the IRS site says to talk to a pro to make sure you’re following the rules.
However, putting more than 100% of your annual salary in is not allowed, no matter what.
If You Are a Teacher, the 403(b) Retirement Plan Could Be the Way to Go
The 403(b) retirement plan is an option offered to a different set of government employees. These can include:
- public school employees (including teachers)
- church employees
- certain tax-exempt organizations
If you fall into one of these categories, then you may qualify for this type of plan. If so, your contributions will come out of your paycheck pre-tax, just like with a 401(k). This means by putting money in your 403(b) plan, you will be reducing your annual taxable income.
Some employers will offer a match for these plans, often up to 50 cents for every dollar you put in. But others will not. You will need to talk with your company’s plan manager ahead of time to find out whether they offer this option.
The withdrawal penalties are the same as a traditional 401(k) plan. So you will want to keep your money in it until after the age of 59 ½ to avoid excess penalties.
403(b) Contribution Limits
Some companies will let you increase your contributions to add another $3,000 annually if you have 15 years of service or more with the same employer. This is definitely an added bonus! Again, if this applies to you, consult a pro to make sure you do this correctly.
The self employed person (which includes 1099 contractors) can have a slightly more difficult time investing for their retirement using tax advantaged accounts. You don’t have a company offering you retirement plan options or matching, unfortunately. But, that doesn’t mean you can’t invest for your future. You certainly can!
There are a few fairly easy ways to begin investing in a retirement account if you fall into this category.
A SEP IRA is for Small Business Owners and Their Employees
SEP stands for a Simplified Employee Pension plan. In many ways, a SEP IRA is a similar type of product as a traditional IRA (explained above) because it follows the same investment, distribution, and rollover rules as a regular traditional IRA. But it does also have some special rules.
A SEP IRA is a form of traditional IRA that is pretty easy for business owners to set up. These business owners usually only have a few employees. This is a good option for them and their employees because it helps to reduce the business’ taxable income for the year.
Sole proprietors are also allowed to set up and use SEP IRAs. If you are a sole proprietor, this is a really great option to max out retirement contributions, since you can put more money in this way.
SEP IRA Contribution Limits
The contribution limits for a SEP IRA vary based on who is doing the contributing.
If you are the employer, you can contribute either:
- up to 25% of the employee’s annual compensation, or
- the same percentage of salary for each employee (Up to $61,000 in 2022, $58,000 in 2021, $57,000 in 2020, or $56,000 in 2019.)
The employer contribution cannot be more than the lesser of the two options.
If you are self-employed, the amount you are allowed to put in gets more complex. You must base your contribution on net profit – minus one-half of the self-employment tax – minus your SEP contribution. (The IRS has has more about this in Pub. 560.) But again, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000 for 2021 and $57,000 for 2020.
If you are the employee and are eligible to participate, you still may or may not be able to contribute. Many SEP plan do not allow employees to put any money in. But if the plan does allow it, then employees may also contribute to their SEP-IRA account. In that case, contribution limits are the same as for a traditional IRA account. (Because a SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan.) But the amount you can deduct might be less or nothing.
The Solo 401(k) is for the Self-Employed with No Other Employees
If you are self-employed, another great option is a Solo 401(k). The IRS calls this a one-participant 401(k). If you have no other employees besides yourself and your spouse, then this could be the plan for you. Everything about this plan is the same as a traditional 401(k) plan, except that it is for the self-employed.
Solo 401(k) Contribution Limits
The biggest perk with this type of account is that you, as the employer, are also the employee. Because you are playing those two roles, there are two kinds of Solo 401(k) contribution limits.
As the self-employed person, depending on the year and your age, the amount of your compensation you can put in is:
Solo 401(k) Employee Contribution Limits
Plus, as your employer role you must put in either:
- up to 25% of annual compensation (as defined by the individual plan) OR
- up to the max you compute using the IRS worksheets and rate tables
In either case, note that the combined contributions can’t be more than a total of the amounts listed below. Also, the IRS notes that “The rules relating to catch-up contributions are complex and your limits may differ according to provisions in your specific plan.”
Solo 401(k) Combined Contribution Limits
Back to category list.
The military has four different retirement systems in play currently. Eligibility for the plans depends upon your join date. Be sure to check with Military OneSource and a pro regarding your choices. There are military compensation calculators you can use too that may help.
Final Pay Plan
If you joined the military prior to September 8, 1980, this is the retirement plan you will fall into. This is figured by multiplying your final monthly base pay by 2.5% for every year of service. So in order to get 100% of your monthly base pay in retirement, you will need to have served 40 years with the military.
High 36 Plan
If you joined the military between September 8, 1980 and July 31, 1986, then you will qualify for the High 36 retirement system. This plan takes your average monthly base pay from your three highest paid years. You get 50% of your highest average base pay if you retire after 20 years of service and 100% if you wait until you have served for 40 years.
If you joined the military between August 1, 1986 and December 31, 2017, then you will qualify for the CSB/REDUX plan OR the High 36 plan. The CSB/REDUX calculation is the same as the High 36 system, but there is an added bonus structure that wasn’t available for the High 36 plan. This bonus is called a Career Status Bonus. It’s a $30,000 cash bonus that you get on your 15 year service anniversary. But then there is also a reduction if you serve less than 30 years that outweighs the benefit in most cases. And there are cost of living adjustments that vary as well.
So the way they have this one set up is pretty complex. The gist of it is that if you retire with less than 30 years under your belt, you will get an average of 40% of your monthly base pay. If you give at least 30 years of service, there is no base pay reduction. So it may be in your best interest to stick it out until at least 30 years so you can max out the benefits of this plan.
Blended Retirement System
If you joined the military on January 1, 2018 or later, then you qualify for the Blended Retirement System (BRS). This new plan tries to make things simpler. With this plan, you will get 40% of your base pay at 20 years of service. At 12 years of service, they also offer a 2.5% base pay bonus as an add on.
While you are in active service, they will also contribute 1% of your base pay to a military Thrift Savings Plan (TSP) for you. When the initial TSP account is set up, an automatic contribution of 3% of your base pay will be set up. You can change this amount at any time, but once you serve for two years, the military will start to add matching contributions up to 5%.
This is a great addition to the previous military retirement plan. You can read more about the Blended Retirement System here.
Summing Up Retirement Plan Options
The hope is that you now have a better idea as to the retirement plan options that may be available to you. So, it’s time to get serious about your financial future now and start investing for retirement. Be sure to update your plan each year too, as things may change.