7 Best Retirement Plans in June 2024

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Defined contribution plans are the best retirement plans because they offer pre-tax contributions, in some cases company matching, investment options and higher annual contribution limits than most IRAs. 

Retirement planning is an essential task. Don’t put it off because you aren’t sure where to put your money or how your retirement plan works. Spend some time learning about the best retirement plans, their features, how much you can contribute annually, and more to set yourself up for success.

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The 7 Best Retirement Plans

As you move jobs, you might have various retirement plan types throughout your career. You also have options for adding plans you set up and administer to enhance your employer-provided options. Get to know the various retirement plans available to make smart investment decisions for when you stop or ease up on working.

1. Defined Contribution Plans

‘Defined contribution plans’ are some of the most commonly offered retirement plans by employers today. Although they were introduced in the early 1980s, they’ve quickly taken over the workplace as employers find them simple to administer. They help put the employee in charge of investment decisions and planning.

In 2024, you can contribute a maximum of $23,000 per year to a defined contribution plan. Once you reach age 50, you can contribute $30,500 per year. 

Some employers also offer a Roth option where you can place after-tax funds in the account, which makes your distributions tax-free during retirement. But you should only use the Roth option if you believe your retirement tax rate will be higher than it is currently.

Here’s a deeper look at the various types of defined contribution plans and when you might use them.

401(k) Plans

The most common defined contribution plan is the 401(k) plan because it is offered at various institutions. When you contribute to these plans, your money goes in pre-tax and grows tax-free until you withdraw it during retirement. At that point, your withdrawals will be taxed at your retirement tax rate.

You can begin taking distributions from a 401(k) plan at age 59.5. You’ll face additional taxes and penalties if you take them before that. 

These plans are ideal for employees whose employer offers this plan. Most employers also offer matching contributions, which can significantly increase your total retirement savings. 

The largest drawback to this account is that you’ll pay large penalties for accessing the money early if you encounter a financial emergency. Some employers offer the option to take out loans on the plan, but those are not guaranteed and are completely up to your employer’s discretion and whether they want to administer that option. 

Investment options for these plans can also be limited, depending on your plan provider and your employer’s options.

403(b) Plans

403(b) plans are defined contribution plans available to public schools, tax-exempt employees, and other organizations. They function similarly to a 401(k) plan. Your money goes in before tax, grows tax-deferred and then is taxed at your tax rate in retirement. Distributions can start at age 59.5. Taking them earlier would mean you are subject to penalties and additional taxes. 

When your employer offers this type of retirement plan, you can automatically save funds from your paycheck to ensure you stay on track with your savings. You’ll invest the funds and can diversify your investments across stocks, mutual funds, annuities, etc. Your employer might offer a matching program where you can get additional funds contributed to your account if you contribute at specific levels.

Like other forms of defined contribution plans, you won’t have access to the funds before age 59.5 without paying penalties, unless your employer offers a loan option. Investment options are limited to what your plan provides.

457(b) Plans

457(b) plans are defined contribution plans for state and local government employees and some tax-exempt organizations. You’ll contribute wages pre-tax, enjoy tax-deferred growth and then pay taxes on the funds once you take distributions in retirement. Enjoy the opportunity to make catch-up contributions once you are age 50. One major perk of these plans is that you don’t face penalties for accessing the funds before age 59.5. That’s because they are classified as supplemental savings plans.

Most plans do not come with employer-matching opportunities. Loans are rarely offered on these accounts. Generally, these savings plans are designed to supplement a governmental pension plan to help you reach your savings goals.

2. IRA Plans

IRA stands for individual retirement accounts, which means you can set them up to supplement your employer-provided retirement plan options. In 2024, you can contribute up to $7,000 annually to an IRA in 2024 and once you reach age 50, you can contribute up to $8,000 annually.

You might feel intimidated by the many options when it comes to IRAs. Here’s a look at the various plans and how they work.  

Traditional IRA

You can contribute to a traditional IRA using pre-tax dollars if you have earned income. That means you won’t pay taxes on the funds you place in the account now but will once you withdraw the funds in retirement. Your investment earnings will grow tax-free until you take distributions during retirement. You can face taxes and penalties if you take distributions before retirement age.

Investment options tend to be more flexible and numerous than defined contribution plans. For example, you might have access to CDs and real estate investments, which you don’t have from your defined contribution plan. While the additional investment options are nice, they are more complex for you to choose and manage independently. 

Roth IRA

In contrast to a traditional IRA, a Roth IRA allows you to put after-tax funds into the account. This means you’ve already paid taxes on the money. When you take distributions from the account in retirement, you won’t pay taxes on those distributions, including the earnings from the account.

Most Roth IRAs also allow you to remove your contributions before age 59.5 without penalty. However, you won’t be able to take your earnings from the account before age 59.5 without penalties.

You’ll have greater control over the investments in your Roth IRA, which can be both good and bad because it requires that you know more and understand the nuances of the account.

Spousal IRA

If your spouse does not have earned income, they can still contribute to a spousal IRA as long as you do. The working spouse must have enough income to cover the contributions to this account. That means you can’t contribute more than you earn in a year.

A spousal IRA can boost retirement savings for single-income households and help the non-working spouse contribute to a retirement plan. Like other IRA types, you’ll need to make investment decisions. These retirement plans offer mostly only upside for plan participants.

Rollover IRA

You can transfer a 401(k) plan into an IRA once you leave the employer that administered the plan. This can help you avoid large fees the 401(k) provider charges and give you more control over your investments. You can choose to create the rollover account as either a traditional IRA or Roth IRA and transition as many funds as you want.

Spend some time learning the requirements for retirement plan rollovers before completing the task, though. If you aren’t careful, the rollover can trigger tax liabilities. These tax liabilities usually only occur if you transition the account to an IRA.

These plans are only available if you have a retirement plan from a previous employer and want to transition it to a new provider with more control over the account.

SEP IRA

These accounts are designed for small business owners and their employees. They do not allow for employee contributions. When the employer makes a contribution, the funds go into an account designed for the employee. If you’re self-employed, you also have access to a SEP IRA.

For 2024, your employer can contribute up to 25% of your total compensation or a maximum of $69,000. Employees can enjoy the free money that their employer provides through these plans. Self-employed individuals might choose this plan if they want to contribute more toward their account than defined contribution plans allow.

SIMPLE IRA

If your employer provides a simple IRA, it has the option to match your contribution by 3% or automatically contribute 2% regardless of whether you contribute. You’ll still get to contribute funds pre-tax, but your employer can choose whether to offer a matching program or automatically contribute regardless of whether you do.

The largest setback to this retirement plan type is that the employee contribution maxes out at $16,000 annually. That’s lower than defined contribution plans, which max out at $23,000.

3. Solo 401(k) Retirement Plan

Business owners and spouses can contribute to a solo 401(k) plan. This allows for up to $23,000 in contributions annually from the employee and up to $69,000 for the business. If you qualify for catch-up contributions, you could earn $7,500 yearly.

Business owners with no other employees to provide a retirement plan, can benefit from these plans because it allows for larger contributions since it combines the employer and employee contribution limits. 

Setting up these accounts is complex and once the account reaches $250,000 you’ll have additional work to do on your taxes because you’ll have to file Form 5500-SE.

4. Traditional Pensions

A traditional pension is a defined benefit plan. They are simple for employees since they don’t require you to make investment decisions and your employer fully funds this account. In retirement, you’ll get a fixed monthly amount.

Few employers offer these accounts because of the financial commitment it requires from the employer once you reach retirement age. The employer often commits to providing a percentage of your salary during retirement based on how many years you were with the employer until you die. Guaranteeing those funds is complex. 

These plans provide financial security for the employee because they know exactly what they’ll receive each month in retirement. However, this does also tie the employee to the employer. The longer you stay, the greater your retirement benefits will be. If you leave before you vest in the retirement plan, you might walk away with no retirement savings for the period, which can set you back in your retirement planning.

5. Guaranteed Income Annuities (GIAs)

You can buy a guaranteed income annuity if you want to enjoy pension benefits. These are often not employer-provided. Instead of getting a lump-sum retirement, you can guarantee monthly payments for life.

Many people opt for deferred income annuities. These allow you to make contributions over several years and then start taking the guaranteed payments when you plan to retire. With each contribution, you’ll increase your guaranteed monthly payout.

You can buy into a guaranteed income annuity with after-tax money, which means you’ll only pay taxes on the distributions you take from the plan. They provide the stability of a pension while also putting you in control of your savings.

These plans lock you into taking distributions starting at a certain age, which can be a negative if you don’t know when you’ll retire and need the funds. Plus, annuities are complex. It’s hard to understand what you are agreeing to without the assistance of a financial advisor. Enter these contracts cautiously. 

6. The Federal Thrift Savings Plan

These plans work much like a 401(k) plan but are available to government employees and uniformed service members. You’ll have access to select from 5 investment options.

  • Bond fund
  • A fund that invests in special-issue Treasury securities
  • Small-cap fund
  • International stock fund
  • S&P 500 index fund

You’ll also have access to target retirement date funds, which can take some of the guesswork out of investments.

With access to these plans, you can get up to 5% employer matching. But you must contribute at least 5% of your income to qualify. Your employer will contribute 1% no matter whether you contribute. Then it matches your first 3% contribution dollar-for-dollar. When you contribute an additional 2%, your employer will match that at 50%.

7. Cash-value Life Insurance Plan

Cash-value life insurance plans come in many forms: universal life, whole life, variable life, and variable universal life. These plans provide a death benefit but also help you grow a cash value in the plan, which can support you during retirement. Your premium payments — also known as the cost basis — are not taxed. Earnings on the plan are taxed at your tax rate at the time of taking distributions.

Using these insurance plans for retirement purposes is complex. If you manage them poorly, you can lose the plan for failure to make premium payments or you can end up with larger taxes. These plans involve some risk and are best used with insights and advice from a financial planner.

Other Accounts for Retirement Savings

Learn about other ways of accumulating retirement savings.

  • Cash balance plans: These plans work similarly to a pension plan but give the employer greater control over limiting contributions. That’s because they don’t guarantee a percentage of your income for life. Instead, they guarantee an account balance. That way, if the investments in the account perform well, the employer can contribute less to the plan while still meeting its obligations.
  • Nonqualified deferred compensation plans: You’ll only have access to this retirement plan type if you’re part of the C-suite. The employer might solely fund this account or it might include salary deferments. 
  • Health savings account: While this isn’t a traditional retirement account, you can use it during retirement to pay for health care expenses, making it a wise place to save. You can contribute to these plans tax-free, enjoy tax-free growth and take distributions tax-free. Once you reach age 65, you can take funds from the account for any purpose, though when not used for healthcare, you’ll pay taxes on the funds.
  • 529 plan: You probably know this as an account for saving for education. But you can convert unused funds to a Roth IRA. That way you don’t have to take massive tax penalties for withdrawing the funds if you don’t use them all for education. This can be a wise retirement move if you’ve maxed out your contributions to other plan types.

Maximize Your Retirement Savings

Combining the benefits and maximum contribution amounts in various retirement plan options can help you build a balanced retirement savings strategy. While the options available through your employer might be limited, you can extend your savings opportunities by opening other retirement plan types. It’s best to consult a financial advisor before making major decisions related to your retirement planning.

Frequently Asked Questions

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A 401(k) plan is the best way to save for retirement because it combines the benefits of managing your investments, maximizing company match and having high contribution limits.

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While a Roth IRA offers more investment options in most cases, your contributions are after tax. Using a combination of pre-tax and after-tax retirement contributions is a wise strategy to reduce your tax burden both now and in retirement.

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IRAs offer more investment options than most 401(k) plans. However, if your employer offers a 401(k) with company matching, you shouldn’t turn it down because you’ll maximize your savings when you add company matching.