Choose Your Retirement Accounts with Confidence

We all know we need to save for retirement. There are several tax-advantaged accounts such as the 401(k) and individual retirement accounts (IRAs) to help save in tax efficient ways. The number of choices can sometimes be intimidating and sometimes the easy choice is no choice. But waiting until we “have more time” or until we get to that “dream career” or until we move to that “next stage of life” can cost us big-time in lost earning years and compound interest. Now is the time to take specific steps to plan and save for the future. 

For most, especially those who are relatively new to the workforce, the best place to start is with the 401(k) retirement plan at work. This is particularly enticing if your employer matches a portion of your contribution. The match is essentially free money once it has vested (you always own the portion of the account that you contributed, and some employers use a vesting schedule for their match).  
 
A good place to start would be to contribute at least enough to receive the full employer match and then try to increase the amount contributed over time. Currently, the 2025 annual participant contribution limit is $23,500 plus an additional $7,000 for those 50 or over and $11,250 for those between 60-63. Your contribution is withheld through payroll deduction and you can save up to the contribution limit of your pretax income, in a Traditional 401(k), or after tax in a Roth 401(k). If you leave your job, you can typically keep it in the plan, roll the account over into a new employer’s 401(k) (if allowable), or rollover to your own IRA. Employees of nonprofits may be offered a 403(b) instead, although they are becoming more rare. They have similar rules to the 401(k). 

Another good option is to fund an Individual Retirement Account (IRA). The 2025 annual limit is $7,000 and $8,000 if you are 50 or over. The money grows tax-free. You can contribute to both an IRA and a 401(k), but if you are covered by a plan at work, you cannot deduct your IRA contributions from your taxable income if you earn more than $79,000 for individuals and $126,000 for married couples filing jointly. If you are not covered by a retirement plan at work, you get the full deduction no matter your income, unless you file jointly with a spouse who has a retirement plan at work.  

With a Roth IRA, you are contributing with after-tax dollars and there is no tax deduction for your contribution. The money you earn grows tax-free, but unlike Traditional IRAs, you pay no tax on withdrawals after you reach 59 ½ and there is no mandatory withdrawal at age 73. You can also withdraw the amount you contributed (not earnings, though) at any time with no penalty or no taxes due. The contribution amounts are the same as a Traditional IRA, but to contribute to a Roth IRA, you must make less than $150,000 for singles and $236,000 for married filers. If your income is higher than $150,000 (single) $246,000 (married filing jointly) but less than or equal to $165,000 (single) or $246,000 (married filing jointly), your allowed contribution is reduced. You can contribute to both a Roth IRA and a traditional IRA, but the annual limits apply to your total contribution. 

Another way to save where you can also minimize taxes and prepare for health care costs is with a Health Savings Account. You can use the money for medications and doctor visit expenses not covered by insurance, but you can also pay those expenses out of pocket and leave the money in your HSA to grow. If you need the money later, you can be reimbursed for past expenses. The annual HSA contribution limit is $4,300 for singles and $8,550 for families covered under qualifying family medical plans, with an additional $1,000 contribution if you’re 55 or older (2025 limits). If you leave the money in the account, it can stay in the account, unlike FSA accounts that must be used by the end of each year.  Once you are 65, you can withdraw money for any reason without penalty, but you must pay income taxes on the money you withdraw if it’s not for qualified medical expenses. Or, you can use it for qualified medical expenses tax-free. If you withdraw the money before you are 65 for any reason other than qualified medical expenses, you will have to pay taxes plus a 20 percent penalty, thus the need to save medical receipts! 

If you are a sole proprietor, you can set up an individual 401(k) or solo 401(k) and make contributions as both the employee and employer. The business owner can contribute elective deferrals up to 100% of compensation up to the annual contribution limit of $23,500 (plus catch-up contributions 50 or over) plus employer nonelective contributions up to 25% of compensation as defined by the plan. Total contributions cannot exceed the 2025 limit of $70,000 (not counting catch-up contributions for those 50 and over). Self-employed individuals must make a special computation using the rate table in Chapter 5 of IRS Publication 560 to figure out the maximum amount of elective deferrals and nonelective contributions. 

A SEP IRA is used primarily by the self-employed or small business owner. SEP stands for simplified employee pension and is usually easier to set up than a solo 401(k). Contributions are made to an Individual Retirement Account established for each plan participant and it follows the same investment, distribution, and rollover rules as traditional IRAs. The contributions you can make to each employee’s SEP-IRA cannot exceed the lesser of 25% of compensation or the 2025 limit of $70,000. The same percentage the employer contributes to the owner’s plan must be given to employees too. Again, if you are self-employed, you must use special rules to calculate contributions for yourself. 

Simple IRAs allow employers with fewer than 100 employees to set up IRAs with less paperwork. Employers must either match employee contributions or make unmatched contributions. Employees can contribute/defer up to $16,500 annually with catch-up contributions of $3,500 for those 50-59, and $5,250 for those 60-63. 

So many good choices! Which plan, or combination of plans is right for you? If you have limited funds to start with, what to do first? If you have contributed the max to one, which is next? As financial planners our job is to walk you through your particular situation, needs and goals to determine the better choice(s) for you and your family. It is not only about dollar amounts, though that is a significant factor. Retirement is also about quality of life, expectations, and what is truly important to you.  Is it family? Health? Travel? Giving? What is important to you now and in the future needs to match where and how you spend and invest those dollars. No more putting it off. Start today.