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.
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.
Pre-Tax vs. Roth deferrals
Some employer plans offer you the option to make Roth 401(k) or Roth 403(b) contributions instead of the standard pre-tax contribution to your 401(k) or 403(b) 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.
- Pre-tax contribution. When you make a pre-tax 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 pre-tax 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.
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.
(Some employers may be less restrictive)
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 pre-tax 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 72 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.
Individuals with earned income
Non-working spouses of individuals with earned income
There is no age limit for contributions made for the 2020 tax year or later due to the SECURE Act changes
Individuals of any age with earned income (subject to modified adjusted gross income limits)
Non-working spouses of individuals with earned income (subject to modified adjusted gross income limits); no age limits
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 pre-tax 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 non-deductible.
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).
Required minimum distributions beginning at age 72.
Distributions to an individual who has non-deductible contributions in any of his or her IRAs will consist of taxable and non-taxable 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 non-taxable.
Early withdrawals of earnings may be subject to tax and a 10% IRS penalty if distributed prior to age 59½ (exceptions apply).
1Inherited Roth IRAs are subject to required minimum distributions
There are other factors to take into account as well so be sure to talk with your financial advisor and tax professional before making a decision about what IRA is right for you.
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.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.