Understanding the Different Types of Retirement Plans | SoFi

retirement will probably be the biggest expense of your life, which means saving for retirement is a big job. This is specially dependable if you envision a retirement that is rich with experiences such as traveling through Europe, spend time with your grow children and grandkids, or turning your home into a angry Kingdom of rescue animals. A retirement save plan can help you accomplish your goals and stay on track .
retirement will likely be the biggest expense of your life .

What Is A Retirement Savings Plan?

A retirement save plan is a scheme for accumulating the money needed to meet one ’ s retirement goals. It may entail different history types ( pension, IRA, 401 ( kilobyte ), etc. ) and guidelines for budget and spend.

Saving and investing for retirement international relations and security network ’ triiodothyronine always so square, beginning with the question of where to save and invest : There are many different types of retirement plans, and it can be confusing to know which is right for you .
Let ’ s get into the specifics for different types of retirement accounts .

How Do Retirement Accounts Work?

retirement accounts ( besides known as retirement plans ) like 401 ( thousand ) sulfur and IRAs provide investors with a tax-advantaged way to save for retirement. Investors with traditional retirement plans pay taxes on their contributions and earnings upon withdrawal. Those with Roth plans pay taxes on contributions up-front and their money is able to grow tax-exempt .
Retirement plans often have tax advantages as compared to saving within a “ regular ” savings account or investing with a brokerage account. There can be other benefits to using a retirement account—such as an employer equal in a 401 ( kilobyte ) —but actually, it ’ s the tax benefits that make them unique .
A discussion of the different types of retirement plans requires an sympathy of that taxation, along with who establishes and uses each account, the rules of the plan, and ultimately, which type is best for you .

Different Types of Retirement Accounts

There are several different types of retirement accounts, including some traditional plan types you may be familiar with vitamin a well as non-traditional options .

What Is A Traditional Retirement Plan?

traditional retirement plans can be individual retirement accounts ( IRAs ) or 401 ( thousand ) s. These tax-deferred retirement plans allow you to contribute pre-tax dollars to an history. With a traditional IRA or 401 ( kelvin ), you only pay taxes on your investments when you withdraw from the score .
Non-traditional retirement plans can include Roth 401 ( k ) and IRAs, for which you pay taxes on funds before contributing them to the account .
Let ’ s take a closer search at some of the most common retirement plan types .

Retirement Plans Offered by Employers

There are typically two types of retirement plans offered by employers :
Defined benefit plans (less common): The employer invests money for retirement on behalf of the employee. Once the employee retires, they receive regular requital ( e.g. $ 100 per month ) angstrom farseeing as they meet the plan ’ randomness eligibility requirements .
Pensions and cash balance accounts are examples of define benefit plans .
Defined contribution plans (more common): The employee invests a assign of their paycheck into a retirement report. sometimes, the employer will match up to a certain come ( e.g. up to 5 % ). In retirement, the employee has access to the funds they ’ ve invested .
401 ( kilobyte ) s and Roth 401 ( kilobyte ) second are examples of defined contribution plans .
Let ’ s get into the specific types of plans employers normally offer .

401(k) Plans

A 401 ( kilobyte ) plan is a type of work retirement plan offered to the employees of a ship’s company. traditional 401 ( kilobyte ) sulfur allow employees to contribute pre-tax dollars, where Roth 401 ( thousand ) s give up after-tax contributions .
Income Taxes: If you choose to make a pre-tax contribution, your contributions will reduce your taxable income. additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers allow you to make after-tax or roth contributions to a 401 ( thousand ). You should check with your employer to see if those are options .
Contribution Limit: $ 19,500 in 2021 and $ 20,500 in 2022 for the employee ; people over the old age of 50 can contribute an extra $ 6,500 in both years .
Pros: Money is deducted from your paycheck, automating the procedure of saving. Some companies offer a company match. There is a importantly higher limit than with Traditional IRA and Roth IRA accounts .
Usually best for: person who works for a caller that offers one, particularly if the employer provides a pit contribution. A 401 ( kilobyte ) retirement design can besides be specially useful for people who want to put retirement savings on automatic pilot .
To consider: Sometimes, 401 ( k ) plans have account alimony or other fees. Because a 401 ( thousand ) plan is set up by your employer, investors merely get to choose from the investment options they provide .
Cons: With a 401 ( k ) plan, you are largely at the mercifulness of your employer—there ’ s no guarantee they will pick plans that you feel are right for you or are cost effective for what they offer. besides the value of a 401 ( kilobyte ) comes from two things : the pre-tax contributions and the employer pit, if your employer doesn ’ thymine catch, a 401 ( potassium ) may not be as valuable to an investor. There are besides penalties for early withdrawals before age 59 ½, although there are some exceptions, including for certain public employees .

Solo 401(k) Plans

This is basically a 1-person 401 ( kilobyte ) plan for freelance individuals or occupation owners with no employees, in which you are the employer and the employee .
Income Taxes: The contributions made to the plan are tax-deductible .
Contribution Limit: $ 19,500 in 2021 ( $ 20,500 in 2022 ), or 100 % of your gain income, whichever is lower, plus “ employer ” contributions of up to 25 % of your compensation from the clientele. The 2021 entire can not exceed $ 58,000 ( $ 61,000 in 2022 ). ( On top of that, people over senesce 50 are allowed to contribute an extra $ 6,500 in 2021 and 2022. )
Pros: A solo 401 ( thousand ) retirement design allows for boastfully amounts of money to be invested with pre-tax dollars. It provides some of the benefits of a traditional 401 ( kelvin ) for those who don ’ t have access to a traditional employer-sponsored 401 ( k ) retirement account .
Usually best for: freelance people with adequate income and a big adequate business to fully use the plan .
Cons: You can ’ thymine open a solo 401 ( kelvin ) if you have any employees ( though you can hire your spouse so they can besides contribute to the plan as an employee—and you can match their contributions as the employer ) .

SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)

This retirement design is set up by an employer, who is required to contribute on employees ’ behalf, although employees are not required to contribute .
Income Taxes: Employee contributions are made with pre-tax dollars. additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement .
Contribution Limit: $ 13,500 in 2021 and $ 14,000 in 2022. Employees long time 50 and complete can contribute $ 16,500 in 2021 and $ 17,000 in 2022 .
Pros: Employers contribute to eligible employees ’ retirement accounts at 2 % their salaries, whether or not the employees do themselves. ( Aka : release money. ) For employees who do contribute, the company will match improving to 3 % .
To consider: lone employers with less than 100 employees are allowed to participate .
Cons: The contribution limits for employees are lower than in a 401 ( k ) and the penalties for early withdrawals—25 % — before historic period 59½ are higher .

SEP Plans (Simplified Employee Pension)

This is a retirement account established by a humble business owner or freelance person for themselves ( and if applicable, any employees ) .
Income Taxes: Your contributions will reduce your taxable income. additionally, the money will grow tax-deferred and you will pay taxes on withdrawals in retirement .
Contribution Limit: For 2021, whichever is lower : $ 58,000 or 25 % of earned income.For 2022, whichever is lower : $ 61,000 or 25 % of earned income .
Pros: Higher contribution limit than IRA and Roth IRAs, and contributions are tax deductible for the business owner .
Usually best for: freelance people and small business owners who wish to contribute to an IRA for themselves and/or their employees .
To consider: Because you ’ re setting up a retirement design for a business, there ’ second more paperwork and unique rules. When opening an employer-sponsored retirement plan, it helps to consult a tax adviser .
Cons: These plans are employer contribution only and greatly trust on the fiscal wherewithal and available cash of the occupation itself .

Profit-Sharing Plans (PSPs)

A retirement plan funded by discretionary employer contributions that gives employees a contribution in the profits of a ship’s company .
Income taxes: Deferred ; assessed on distributions from the report in retirement .
Contribution Limit: The lesser of 25 % of the employee ’ s compensation or $ 58,000 in 2021. That limit increases to $ 61,000 in 2022 .
Pros: An employee receives a percentage of a company ’ sulfur profits based on its earnings. Companies can set these up in summation to other stipulate retirement plans, and make contributions on a wholly voluntary basis .
Usually best for: Companies who want the flexibility to contribute to a PSP on an ad hoc basis .
To consider: early coitus interruptus from the plan is subject to penalty .
Cons: These plans put employees at the mercy of their employers ’ profits, unlike retirement plans that allow employees to invest in securities issued by other companies .

Defined Benefit Plans

These plans, more normally known as pension plans, are retirement plans provided by the employer where an employee ’ s retirement benefits are calculated using a recipe that factors in historic period, wage, and duration of employment .
Income taxes: Deferred ; assessed on distributions from the design in retirement .
Contribution limit: Determined by an enroll statistician and the employer .
Pros: Provides tax benefits to both the employer and employee and provides a fix payout upon retirement that many retirees find desirable .
Usually best for: Companies that want to provide their employees with a “ defined ” or pre-determined benefit in their retirement years .
To consider: These plans are becoming less popular because they cost an employer importantly more in sustenance than a defined contribution plan such as a 401 ( potassium ) program .
Cons: These plans are increasingly rare, but for those who do have them, issues can include trouble realizing or accessing benefits if you don ’ thyroxine work at a party for long enough .

Employee Stock Ownership Plans (ESOPs)

A qualify defined contribution plan that invests in the broth of the sponsoring employer .
Income taxes: Deferred. When an employee leaves a company or retires, they receive the bonny commercialize rate for the sprout they own. They can either take a taxable distribution or roll the money into an IRA .
Contribution limits: Allocations are made by the employer, normally on the footing of relative pay. There is typically a vest schedule where employees gain access to shares in one to six years .
Pros: Could provide tax advantages to the employee. ESOP plans besides align the interests of a company and its employees .
Cons: These plans concentrate gamble for employees : An employee already risks losing their job if an employer is doing ailing financially, by making some of their recompense employee stock, that risk is magnified. In contrast, other retirement plans allow an employee to invest in stocks in early securities that are not tied to the fiscal performance of their employer .
💡 Recommended: Guide to Employee Stock Ownership Plans

457 Plans

A 457 ( bacillus ) plan is an employer-sponsored postpone recompense plan for employees of submit and local anesthetic government agencies and some tax-exempt security organizations.

Income taxes: If you choose to make a pre-tax contribution, your contributions will reduce your taxable income. additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers besides allow you to make after-tax or roth contributions to a 401k .
Contribution limits: $ 19,500 in 2021 and $ 20,500 in 2022 ; some plans allow for “ catch-up ” contributions .
Pros: plan participants can withdraw as soon they are retired at any historic period, they do not have to wait until age 59½ as with 401 ( potassium ) and 403 ( bacillus ) plans .
Usually best for: Employees of governmental agencies .
Cons: 457 plans do not have the lapp kind of employer catch as a 401 ( potassium ) design. While employers can contribute to the design, it ’ s only up to the combine specify for individual contributions .

Employees Retirement System

The Federal Employees Retirement System ( FERS ) consists of three government-sponsored retirement plans :
• The Basic Benefit Plan,
• Social Security,
• Thrift Savings Plan .
The Basic Benefit Plan is an employer-provided pension plan, while the Thrift Savings Plan is most analogous to what private-sector employees can receive .
Income Taxes: Contributions to the Thrift Savings plan are made before taxes and grow tax-exempt until withdrawal in retirement .
Contribution Limit: For 2021 the contribution limit for employees is $ 19,500, and the unite limit for all contributions, including from the employer representation, is $ 58,000. For 2022 the employee contribution limit increases to $ 20,500 and the aggregate limit for all contributions is $ 61,000. besides, those over 50 are eligible to make an extra $ 6,500 in “ catch-up ” contributions .
Pros: These government-sponsored plans are renowned for their low administrative fees and employer matches .
Usually best for: Federal government employees who will work at their agencies for a long period ; it is comparable to 401 ( thousand ) plans in the individual sector .

Cash-Balance Plans

This is another type of pension plan that combines features of defined benefit and defined contribution plans. They are sometimes offered by employers that previously had defined benefit plans. The plans provide an employee an “ employer contribution equal to a percentage of each year ’ sulfur earnings and a rate of return on that contribution. ”
Income Taxes: Contributions come out of pre-tax income, alike to 401 ( thousand ) .
Contribution Limit: The plans combine a “ yield citation ” based on an employee ’ second wage and an “ interest credit ” that ’ s a certain percentage pace ; the employee then gets an report balance worth of benefits upon retirement that can be paid out as an annuity ( payments for life ) or a lout kernel. Limits depend on historic period, but for those over 60, they can be more than $ 250,000 .
Pros: Can reduce taxable income .
Usually best for: high earners, business owners with consistent income .

Nonqualified Deferred Compensation Plans (NQDC)

These are plans typically designed for executives at companies who have maxed out other retirement plans. These plans defer payments—and the taxes—you would otherwise receive as wage to a late date .
Income Taxes: Income taxes are deferred until you receive the payments at the agreed-upon date .
Contribution Limit: none
Pros: The plans don ’ t have to be entirely geared around retirement. While you can set dates with some flexibility, they are fixed .
Usually best for: Highly-paid employees for whom typical retirement plans would not provide adequate savings compared to their income .

Retirement Plans Not Offered by Employers

Traditional Individual Retirement Accounts (IRAs)

individual retirement accounts ( IRAs ) are managed by the individual policyholder .
With an IRA, you open and fund the IRA yourself. This is not a plan you join through an employer .
Income Taxes: You may receive an income tax deduction on contributions ( depending on your income and access to another retirement design through workplace ). The balance in the IRA will always grow tax-deferred, and withdrawals will be taxed ( the measure will vary depending on whether contributions were deductible or non-deductible ) .
Contribution Limit: $ 6,000 in 2021 and 2022 $ 7,000 for people old age 50 or all over .
Pros: You might be able to lower your tax bill if you ’ re eligible to make deductible contributions. additionally, the money will grow tax-deferred, which can make a deviation over a long period of fourth dimension. ultimately, there are no income limits for contributing to a traditional IRA .
Usually best for: People who can make deductible contributions and want to lower their tax bill, or individuals who earn besides much money to contribute directly to a Roth IRA. Higher-income earners might not get to deduct contributions from their taxes nowadays, but they can take advantage of tax-deferred growth between nowadays and retirement. An IRA can besides be used for consolidating and rolling over 401 ( k ) accounts from former jobs .
To consider: There is a 10 % penalty for withdrawing funds ahead age 59½. You can not deduct IRA contributions if you ’ re already covered by a retirement account through your bring and earn more ( according to your modified crying adjusted income ) than $ 76,000 in 2021 or $ 78,000 in 2022 ( with a phase-out begin at $ 66,000 in 2021 and $ 68,000 in 2022 ) .
Cons: Traditional IRAs come with a number of restrictions, including how much can be contributed and when you can start withdrawals without punishment. traditional IRAs are besides basically a count on the tax rate you will be paying when you begin withdrawals after age 59½, as the accounts grow tax-deferred but are taxed upon coitus interruptus. besides, traditional IRAs generally mandate withdrawals starting at old age 72 .

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Roth IRAs

A Roth IRA is another individual retirement account that is managed by the individual policyholder, not an employer .
Income Taxes: Roth IRA contributions are made with after-tax money, which means you won ’ metric ton receive an income tax deduction for contributions. But your poise will grow tax-exempt and you ’ ll be able to withdraw the money tax-exempt in retirement .
Contribution Limit: $ 6,000 in 2021 and 2022 $ 7,000 for people historic period 50 or over .
Pros: While contributing to a Roth IRA won ’ t lower your tax bill now, having the money grow tax-exempt and being able to withdraw the money tax-exempt down the road provides measure in the future .
Usually best for: person who wants to take advantage of the flexibility to withdraw from an report during retirement without paying taxes. additionally, it can be specially beneficial for people who are presently in a low income-tax bracket and expect to be in a higher income tax bracket in the future .
To consider: To contribute to a Roth IRA, you must have an earned income. Your ability to contribute begins to phase out when your income ( specifically, your modified adjusted megascopic income ) reaches $ 125,000 in 2021 or $ 129,000 in 2022. As a joint filer, your ability to contribute to a Roth IRA phases out at $ 198,000 in 2021 and $ 204,000 in 2022 .
Cons: Like a traditional IRA, a Roth IRA has tight contribution restrictions. Unlike a traditional IRA, it does not offer tax deductions for contributions. As with a traditional IRA, there ’ s a penalty for taking some kinds of distributions before long time 59 ½ .

Payroll Deduction IRAs

Either a traditional or Roth IRA that is funded through payroll deductions .
Income Taxes: For a Traditional IRA, you may receive an income tax subtraction on contributions ( depending on income and access to a retirement plan through influence ) ; the poise in the IRA will always grow tax-deferred, and withdrawals will be taxed ( how much is tax depends on if you made deductible or non-deductible contributions ). For a Roth IRA, contributions are made with after-tax money, your balance will grow tax-exempt and you ’ ll be able to withdraw the money tax-exempt in retirement .
Contribution Limit: $ 6,000 in 2021 & 2022 or $ 7,000 for people age 50 or over .
Pros: mechanically deposits money from your paycheck into a retirement account .
Usually best for: People who do not have access to another retirement plan through their employer .
To consider: These have the same rules as a Traditional IRA, such as a 10 % punishment for withdrawing funds earlier historic period 59½. only employees can contribute to a Payroll Deduction IRA .
Cons: The employee must do the work of setting up a plan, and employers can not contribute to it as with a 401 ( kilobyte ). Participants can not borrow against the retirement design or use it as collateral for loans .

Guaranteed Income Annuities (GIAs)

These are products sold by indemnity companies. They are similar to the increasingly rare defined benefit pensions in that they have a fixed payout that will concluding until the end of animation. These products are generally available to people who are already eligible to receive payouts from their retirement plans .
Income Taxes: If the annuity is funded by 401 ( kelvin ) benefits, then it is taxed like income. Annuities purchased with Roth IRAs, however, have a different tax structure. For “ non-qualified annuities, ” i.e. annuities purchased with after-tax income, a formula is used to determine the taxes so that the earnings and principal can be separated out .
Contribution Limit: Annuities do not have contribution limits .
Pros: These allow for payouts until the conclusion of life and are fixed, meaning they ’ rhenium not dependent on market operation .
Usually best for: People who have high levels of savings and can afford to make expensive initial payments on annuities .

Cash-Value Life Insurance Plan

Cash-value life indemnity covers the policyholder ’ second entire life and has tax-deferred savings, making it comparable to other retirement plans. Some of the premium paid every month goes to this investment product, which grows over time .
Income Taxes: Taxes are deferred until the policy is withdrawn from, at which point withdrawals are taxed at the policyholder ’ s current income tax rate .
Contribution Limit: The plan is drawn up with an insurance company with set premiums .
Pros: These plans have a tax-deferring feature and can be borrowed from .
Usually best for: high earners who have maxed out other retirement plans .

The Takeaway

Depending on your employment circumstances, there are many possible retirement plans in which you can invest money for retirement. Some are offered by employers, others can be set up by an individual .
similarly, the benefits for each of the available retirement plans differ, though they all partake one positivist property : investing in them is an authoritative step in saving for retirement .
If you ’ re opening your own retirement savings account such as an IRA or Roth IRA, you can do so at a brokerage house, savings bank, common fund house, or other fiscal services party, like SoFi Invest® .
SoFi Invest not merely assists you in establishing a retirement bill, but we invest your money in accord with your goals and hazard tolerance. And members get complimentary access to a fiscal adviser .

Find out how SoFi Invest can help you reach your long-term financial goals.

SoFi Invest®
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