How to Know What Retirement Plan to Choose


Saving enough for retirement can be challenging on its own, and many workers face the added challenge of figuring out what retirement accounts to utilize. From traditional 401(k) plans to solo 401(k)s to Roth IRAs, you may choose from a range of retirement savings vehicles, each with different benefits and rules.

Fortunately, if you’re wondering how to know what retirement plan to choose, the good news is that there aren’t necessarily any wrong options, and you don’t have to pick just one plan.

All retirement accounts can help you reach your retirement planning goals, though some can potentially help you get there more efficiently and effectively. Still, because variables such as future tax rates are out of your control, figuring out the right retirement accounts for you can involve a bit of educated guessing and even hedging your bets.

But as long as you can answer how choosing certain retirement accounts aligns with your retirement planning goals, you’re likely on a good track.

A few steps to determine what retirement plan to choose include:

Start with Eligibility

To narrow down your options and make it easier for you to know what retirement plan to choose, start by determining the retirement accounts you’re eligible for. If you’re an employee, review your company’s benefits or speak with HR to see the available plans, such as traditional 401(k)s and Roth 401(k)s.

In this case, you won’t need to worry about retirement accounts like solo 401(k)s that apply to self-employed individuals, and you can instead focus on the pros and cons of your employer’s plans.

If you are self-employed or a small business owner, you can look into other plans such as a Simplified Employee Pension IRA (SEP-IRA) or Savings Incentive Match Plan for Employees (SIMPLE) IRA.

SIMPLE IRAs are used for small businesses with 100 employees or fewer, and they allow business owners to save for their own retirement while contributing to their employees’ retirement accounts. Thus, if you’re a small business owner with employees, a SIMPLE IRA could be an option, whereas if you’re a solopreneur, you may be better off with the self-employed options like solo 401(k)s.

Next, consider the types of personal accounts you may be eligible for, such as traditional IRAs and Roth IRAs. You can determine this eligibility by reviewing the IRS’ website or speaking with a fiduciary financial advisor.

For example, if you are single and your modified adjusted gross income (AGI) is $137,000 or more, you won’t be eligible to make a Roth IRA contribution. You’ll have the same issue if you’re married filing jointly and have a modified AGI of $203,000 or more. However, you may be eligible for both a 401(k) and an IRA, for example, so don’t assume that having one type of account means you can’t contribute to others.


Consider Matching Contributions

The more you can put away in retirement savings, the easier it can be to meet your retirement savings goals. Anytime you can receive matching contributions to your retirement accounts, you should consider taking advantage of the opportunity. Think of matching contributions as FREE MONEY from your employer.

Matching contributions typically occur with 401(k) plans but can also occur in others such as SIMPLE IRAs. For example, your employer may offer to match contributions to your 401(k) of up to 6% of your salary. This means if you earn $100,000 per year and save $6,000 in a 401(k), your employer will also add $6,000 to your 401(k).

Yet depending on your employer’s matching-contribution rules, if you contribute less than 6%, they may only match the lower amount that you save. Be sure to check their matching-contribution rules.

And while it often makes sense to save as much as required to optimize matching contributions, once you hit that amount you could choose another retirement plan to put any remaining contributions that you’d like to make. Or you could max out your contribution limits (see the next section) in your employee plan. Your choice will depend on your situation and retirement goals.

Take Contribution Limits into Account

Another way to narrow down your options is to consider contribution limits, as some retirement accounts allow you to save more than others.

For example, traditional and Roth IRAs have combined annual contribution limits of $6,000 per person (plus $1,000 in catch-up contributions for those ages 50 and over). Comparatively, 401(k)s have contribution limits of $19,000 (plus $6,000 in catch-up contributions). Thus, if you want to save more than $6,000 per year, a 401(k) may be a good option for you.

You could choose multiple retirement savings vehicles to maximize contributions, such as saving $6,000 in a 401(k) to receive the maximum contribution from your employer, while also saving $6,000 per year in a Roth IRA to take advantage of the tax breaks that come from these accounts, as explained more in the next section.


Tax Considerations and Investment Options May Help You Decide

Lastly, consider what types of retirement accounts can help you maximize your finances by offering the tax benefits and investment options that align with your retirement planning goals.

For example, with Roth IRAs and Roth 401(k)s, although your taxable income isn’t reduced, your investment gains can accumulate tax-free, and you can make tax-free withdrawals from Roth accounts in retirement. Thus, if you think your income might be taxed at higher rates in retirement, then allocating to a Roth account could be a good idea. Conversely, if you expect your income to be taxed at lower rates in retirement, then a traditional IRA or 401(k) might be a better option.

You can also hedge your bets by contributing to multiple types of accounts. For example, you could contribute to a Roth 401(k), and then any employer match contributions would, by law, automatically be deposited into a traditional 401(k). You could also allocate to a traditional IRA to provide you with flexibility and diversification, such as if your employer’s 401(k) has only a few mutual funds to choose from, while your IRA investment options may be far broader.

Overall, choosing what retirement plan to contribute to depends on several factors, including your financial situation, retirement goals, and employment status. There’s no one way to optimize retirement savings; however, the pointers in this article may be able to help you narrow down your options.

You may also get personalized advice by speaking with a CERTIFIED FINANCIAL PLANNER™ professional. Our fee-only financial advisor firm in Central Florida reviews retirement plan options as part of the fiduciary financial planning we provide for clients.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.