Retirement 101 Part 2: The most comprehensive retirement account breakdown EVER

IN THIS BLOG WE'LL BE GOING OVER 401(K)S, ROTH 401(K)S, TRADITIONAL IRA'S, ROTH IRA'S, 403(B) AND 457 PLANS, SIMPLE IRA'S AND HSA'S.

Understanding the diverse landscape of retirement accounts is crucial in the journey toward a secure and comfortable retirement. Each account serves a unique purpose and offers distinct advantages, from the ever-popular 401(k)s and IRAs to specialized options like HSAs and 403(b)s. 

This comprehensive guide will navigate this financial terrain, shedding light on various retirement accounts' key features and benefits. Whether you're just starting your retirement savings or looking to optimize your existing portfolio, this exploration will equip you with the knowledge to make informed decisions about securing your financial future.

⭐️ - indicate the most unique quality of the account.

TRADITIONAL 401(k) Plans 

Who Can Use Them: Typically offered by employers to their employees.

Key Benefits:

•  Contributions are often tax-deductible: in the year they are made, potentially reducing your taxable income for that year and ⭐️ lowering your immediate tax bill. (Please see Roth vs traditional blog to learn more)
•  Tax-Deferred Growth: Any earnings on investments within a Traditional 401(k) grow tax-deferred until you withdraw after 59.5; then, you will have to pay ordinary income tax. 
•  Employers may match your contributions, essentially giving you free money. (This is a great part of your benefits package. You can always negotiate for more pay or advocate for it in company town halls if it's not offered.
•  Typically managed by a third-party administrator and often provides basic financial planning resources. 401(k) plans offer diverse investment options, including stocks, bonds, mutual funds, and more, allowing you to customize your portfolio according to your retirement goals and risk tolerance.

Tax Treatment of Contributions:

•  Traditional 401(k) contributions are made with pre-tax dollars, reducing your annual taxable income. This can result in a lower tax withholding on your paycheck, increasing your take-home pay. (See Roth vs traditional blog)

Contribution Limits (2023):

•  In 2023, you can contribute up to $22,500 to a Traditional 401(k) as an employee $66,000 for combined employee/employer contributions. If you're 50 or older, you can make an additional catch-up contribution of up to $7,500, bringing the total limit to $30,000.

Required Minimum Distributions (RMDs):

•  Starting at age 72 (or 70½ for those who turned 70½ before January 1, 2020), you are required to begin taking Required Minimum Distributions (RMDs) from your Traditional 401(k) account each year. These withdrawals are subject to income tax. 

ROTH 401(k) Plans 

Who Can Use Them: Typically offered by employers to their employees.

Key Benefits:

• ⭐️ Tax-free withdrawals on contributions and earnings in retirement. You pay taxes today, which makes your take-home pay less, but you do not pay taxes during retirement. (Please see Roth vs traditional blog to learn more)
•  Employers may match your contributions, essentially giving you free money. (This is a great part of your benefits package. If it’s not offered, you can always negotiate for more pay or advocate for it, in company town halls.
• Typically managed by a third-party administrator and often provides basic financial planning resources. Roth 401(k) plans offer diverse investment options, including stocks, bonds, mutual funds, and more, allowing you to customize your portfolio according to your retirement goals and risk tolerance.
•  No income limitation to contribute: Roth IRAs (see below), have an income limit, but Roth 401ks do not.

Tax Treatment of Contributions:

•  Contributions to a Roth 401(k) are made with after-tax dollars. This means you won't receive an immediate tax deduction for contributing, which can impact your take-home pay. But you will not pay any taxes in the future on earnings and contributions. 

Contribution Limits (2023):

•  In 2023, you can contribute up to $22,500 to a Traditional 401(k) as an employee $66,000 for combined employee/employer contributions. If you're 50 or older, you can make an additional catch-up contribution of up to $7,500, bringing the total limit to $30,000.

⭐️ No Required Minimum Distributions (RMDs): 

•  Roth 401(k)s do not have RMDs during the account holder's lifetime. This means you can leave the money invested for as long as you want, potentially passing it on to heirs without the immediate tax implications of RMDs.

*Roth 401(k)s are a newer product, and your employer might not offer this benefit. Always be sure to communicate with your HR department and encourage them to add this benefit. 

Traditional IRAs (Individual Retirement Accounts)

Who Can Use Them: Anyone with earned income can contribute.

Key Benefits:

•  Contributions are tax-deductible in the year they are made, potentially reducing your taxable income for that year and lowering your immediate tax bill.
•  Earnings grow tax-deferred until withdrawal, allowing your investments to compound over time without immediate taxation.
•  Wide range of investment choices. Your account can be managed by a person, robonvestor, or self-managed.
• ⭐️ Anybody can open: A great retirement plan when your company does not provide a retirement benefit, as it does not require employment to open. 

Tax Treatment of Contributions:

•  Contributions to a Traditional IRA are made with pre-tax dollars for most individuals. However, if an employer-sponsored retirement plan covers you or your spouse, income limits may affect the deductibility of your contributions. You cannot contribute more than $22,500 in a 401k and IRA combined. 

Contribution Limits (2023):

•  In 2023, the annual contribution limit for a Traditional IRA is $6,500 for individuals under 50. If you're 50 or older, you can make an additional catch-up contribution of up to $1,000, bringing the total limit to $7,500.

Required Minimum Distributions (RMDs):

•  Starting at age 72 (or 70½ for those who turned 70½ before January 1, 2020), you must begin taking Required Minimum Distributions (RMDs) from your Traditional IRA each year. These withdrawals are subject to income tax.

Roth IRAs

Who Can Use Them: Individuals with income below a certain threshold.

➡️Individuals who have a modified adjusted gross income of $153k or less

➡️Married filing jointly have a modified  adjusted gross income of $218k or less

Key Benefits:

•  ⭐️Contributions are made with after-tax dollars. After five years, all contributions can be taken out of the account tax-free, with no penalty. Said in a different way You can take out any contributuons before retirement without penalty or tax implication, if the account has been opened for five years. 
•  ⭐️ Tax-Free Withdrawals: One of the primary advantages of a Roth IRA is that qualified withdrawals in retirement are entirely tax-free, including both contributions and earnings. This can lead to significant tax savings in retirement.
•  ⭐️No required minimum distributions (RMDs): during the account holder's lifetime and no age limits for contributions, allowing individuals to continue contributing as long as they have earned income.
•  Wide range of investment choices. Your account can be managed by a person, robonvestor, or self-managed.

 Tax Treatment of Contributions:

•  Contributions to a Roth IRA are made with after-tax dollars, so you won't receive an immediate tax deduction for contributing. However, this means you can potentially withdraw your contributions at any time without taxes or penalties after five years of owning the account.

Contribution Limits (2023):

•  In 2023, the annual contribution limit for a Traditional IRA is $6,500 for individuals under 50. If you're 50 or older, you can make an additional catch-up contribution of up to $1,000, bringing the total limit to $7,500. You cannot contribute more than $22,500 in a 401k and IRA (roth or traditional) combined. 

⭐️No Required Minimum Distributions (RMDs):

•  Roth IRAs do not have RMDs during the account holder's lifetime. This means you can leave the money invested for as long as you want, potentially passing it on to heirs without the immediate tax implications of RMDs.

403(b) Plans

Who Can Use Them: Employees of tax-exempt organizations and public schools, including teachers, healthcare workers, and employees in nonprofit institutions.

•  Contributions are often tax-deductible. (Please see Roth vs. traditional blog to learn more.)
•  Tax-Deferred Growth: Any earnings on investments within a Traditional 401(k) grow tax-deferred until you withdraw them in retirement. (See Roth vs. traditional blog)
•  Employers may match your contributions, essentially giving you free money. (This is a great part of your benefits package. You can always negotiate for more pay or advocate for it in company town halls if it's not offered.
•  Typically managed by a third-party administrator and often provides basic financial planning resources.

Tax Treatment of Contributions:

•  Contributions to a 403(b) are made with pre-tax dollars, reducing your annual taxable income. This can result in a lower tax withholding on your paycheck, increasing your take-home pay. 

Contribution Limits (2023):

•  In 2023, you can contribute up to $22,500 to a 403(b) as an employee $66,000 for combined employee/employer contributions. If you're 50 or older, you can make an additional catch-up contribution of up to $7,500, bringing the total limit to $30,000.

No Required Minimum Distributions (RMDs) while working:

•  Employees can delay taking RMDs from their 403(b) plans as long as they continue working. RMDs become mandatory after 59.5 unless you leave your employment earlier, so withdrawals need to be made starting a 55. 

Vesting and Withdrawal Rules:

•  403(b) plans may have vesting schedules that determine when you have full ownership of the employer side of those contributions. Withdrawals before age 59½ may be subject to a 10% penalty in addition to income tax unless an exception applies. See RMD details above. 

457 Plans

Who Can Use Them: State and local government employees, including teachers, firefighters, police officers, and other public sector workers. Some nonprofit organizations also offer 457(b) plans.

Key Benefits:

•  Tax-Deferred Growth: Any earnings on investments within a 457 plan grow tax-deferred until you withdraw them in retirement.
•  Supplemental Retirement Savings: 457 plans serve as supplemental retirement savings, allowing government employees to save beyond their primary pension plans.
•  Typically managed by a third-party administrator and often provides basic financial planning resources.

Tax Treatment of Contributions:

•  Contributions to a 457 plan are typically made with pre-tax dollars, reducing your taxable income for the year in which they are made. Some government entities offer a Roth 457 option.  If this is the case, then contributions are made with post-tax dollars, increasing your taxable income but allowing you to take out the money in retirement tax-free. 

Contribution Limits (2023):

•  In 2023, you can contribute up to $22,500 to a 547 plan as an employee $66,000 for combined employee/employer contributions. If you're 50 or older, you can make an additional catch-up contribution of up to $7,500, bringing the total limit to $30,000.

⭐️ No 10% Early Withdrawal Penalty:

•  One notable advantage of 457 plans is that there's no 10% early withdrawal penalty for withdrawals before age 59½, unlike many other retirement plans. However, withdrawals are subject to income tax.

No Required Minimum Distributions (RMDs) while working:

•  Employees can delay taking RMDs from their 457 plans as long as they continue working. RMDs become mandatory after 73.

SIMPLE IRAs (Savings Incentive Match Plan for Employees)

Who Can Use Them: Small businesses with up to 100 employees, including self-employed individuals. Employers establish SIMPLE IRAs for their employees, and employees can also contribute to their own accounts.

Key Benefits:

•  Employer Matching Contributions: One of the primary advantages of SIMPLE IRAs is that employers are required to contribute to their employees' accounts. ⭐️ This provides an opportunity for employees to receive additional retirement savings beyond their own contributions.
•  Tax-Deferred Growth: Any earnings on investments within a SIMPLE IRA grow tax-deferred until you withdraw them in retirement.
•  Simplified Administration: SIMPLE IRAs are easier to set up and maintain than traditional 401(k) plans, making them an attractive option for small businesses.

Tax Treatment of Contributions:

•  Contributions to a SIMPLE IRA are made with pre-tax dollars, reducing your annual taxable income. This can result in a lower tax withholding on your paycheck, increasing your take-home pay. 

Contribution Limits (2023):

• Employees can contribute up to $15,500 to a SIMPLE IRA. If you're 50 or older, you can make an additional catch-up contribution of up to $3,500, bringing the total limit to $19,000.

⭐️ No Age or Income Limits:

•  Unlike some retirement plans, SIMPLE IRAs do not have age or income restrictions, allowing employees of all ages and income levels to participate.

HSA (Health Savings Account)

Who Can Use Them: Individuals with a high-deductible health plan (HDHP).

Key Benefits:

•  ⭐️ Triple tax advantage: Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
•  Employers may also contribute to employees' HSAs. If your employer doesn't, you can use this benefit to negotiate pay. 
• ⭐️ Portable and Long-Term: Unused funds can be invested and used for retirement healthcare expenses.
•  Qualified Medical Expenses: Funds in an HSA can be used for a wide range of qualified medical expenses, including doctor visits, prescriptions, dental care, vision care, and more. 

⭐️ Tax Treatment of Contributions:

•  Contributions to an HSA are tax-deductible, reducing your taxable income for the year in which you make the contribution. Your contributions are not subject to federal income tax, state income tax (in most states), or FICA taxes. When taken out for medical reasons, you also save on taxes. 

Contribution Limits (2023):

•  In 2023, you can contribute up to $3,850 for an individual HSA or up to $7,750 for a family HSA. If you're 55 or older, you can make an additional catch-up contribution of $1,000.

Non-Medical Withdrawals:

•  If you withdraw funds for non-medical expenses before age 65, you'll incur a 20% penalty in addition to income tax on the amount withdrawn.⭐️ After age 65, you can withdraw funds for non-medical expenses without the penalty (though income tax still applies).

⭐️Retirement Savings:

•  HSAs can serve as a unique retirement savings vehicle. After age 65, you can use HSA funds for any expense without penalties (though income tax may apply). This flexibility makes HSAs a valuable tool for covering healthcare costs in retirement.

Investment Potential:

•  Some HSA providers offer investment options once your account reaches a certain balance. Investing HSA funds in a diversified portfolio can help your savings grow over time.

Your best retirement account depends on your unique circumstances, including your employment situation, income level, and long-term financial goals. Consult with a financial planner to determine the most suitable retirement accounts for your needs and to create a retirement strategy that ensures a comfortable and secure future. 

Remember, the key to a successful retirement plan is starting early and consistently contributing to your chosen accounts. Your future self will thank you for the financial security you've built!

If this feels overwhelming to you but you're ready to take your future seriously, reach out and we'll help you navigate and organize your finances so long term decisions become easy and fun to make!

Disclaimer: This website and its content is owned by Beyond The Green Coaching. AJ Schneider and the Financial Freedom Coaches are NOT financial planners, attorneys, accountants, therapists, counselors or psychologists. The information on this website and in the resources provided is for educational and informational purposes only. You acknowledge that you are participating voluntarily in using our resources, and you are personally responsible for any choices, actions and outcomes now and in the future. Before making any financial or investment decisions, we recommend you consult a financial planner. Beyond The Green Coaching is not liable for any errors or omissions of information supplied in these materials.