Best Retirement Plans for 2023

Within each, there are several sub-retirement plans. This mainly consists of a traditional and Roth, but others exist too.

The one that you opt for will depend on a variety of factors. This includes your age, whether your employer offers matched contributions, and which assets you plan to invest in.

Nonetheless, the first step is to have an understanding of the difference between a 401(k) and an IRA. After that, you can choose the best sub-account for your personal requirements.

For a comprehensive look at a Roth IRA vs 401(k) read my guide here.

An overview of 401(k) plans

401(k) plans are offered by most, but not all, US employers. In 2023, you can contribute up to $22,500 per year. If you are over the age of 50, this increases by $7,500 to $30,000.

If your employer offers matching contributions, a 401(k) is likely to be the best option. This is because, for every $1 you contribute, your employer will match it up to a certain amount each year. This will fast-track the amount of money you are able to contribute to your retirement savings.

Furthermore, any matching employer contributions are in addition to the 2023 limits I mentioned above. Just like IRAs, 401(k)s generally come with two options; traditional and Roth.

This determines whether the contributions are made with pre and after-tax dollars. Once you are set up you will need to choose which investments to make. Unlike IRAs, your options will be limited as this is determined by your employer.

This will likely include a selection of US index funds, such as the S&P 500.

An overview of IRA (Individual Retirement Accounts) plans

The other primary option when exploring retirement plans is an IRA.

IRAs are usually, but not always, offered by online brokers and banks. You will have access to a much larger suite of investments, including stocks, ETFs, index funds, and mutual funds.

Some IRAs even support Bitcoin. IRAs come with much lower annual limits. If you are under 50, you can invest up to $6,000 in 2023. Being over the age of 50 increases your annual limits by just $1,000 to $7,000.

IRAs also come with the option of a traditional or Roth plan. Other options include a rollover, SEP, simple, and payroll deduction IRA. I explain the basics of each IRA (Individual Retirement Account) plan further down.

Traditional 401(k)

A traditional 401(k) allows you to contribute to your retirement savings with pre-tax dollars. This means that you can invest a larger amount on each contribution, as you are not paying tax on the income.

The benefit of this is that your money will compound faster over the course of time. However, when you get to the age of retirement, you will pay tax on all your traditional 401(k) withdrawals.

Therefore, traditional 401(k)s are generally suitable if you believe you will be in a lower tax bracket when you retire.

Roth 401(k)

Roth 401(k)s are also offered by US employers and come with the same contribution limits as their traditional counterpart. The core difference is that you will be investing with after-tax dollars.

This means that you will pay tax on the invested income as you normally would. But when you get to the age of retirement, you can withdraw funds from your Roth tax-free.

This option is generally suitable if you have time on your side.

After all, over the course of several decades, your investment gains are likely to supersede what you would have made by investing with pre-tax dollars.

403(b) plans

403(b) plans are offered by government agencies and non-profit organizations rather than private companies.

The largest beneficiary of a 403(b) plan are employees working for public schools or universities. Other occupations are also eligible, such as church employees and clergy members.

403(b) plans come with the same annual limits as 401(k)s. The main difference is that 403(b)s offer higher catch-up contributions if the employee has worked for the organization for at least 15 years.

If this is the case, an additional $3,000 can be contributed each year up to a maximum of $15,000. Catch-up contributions can be made even if the employee is under the age of 50.

457(b) plans

457(b) plans are offered by both state and local government agencies. Annual contribution limits are also the same as 401(ks). However, 457(b) plans come with two key advantages.

First, this retirement plan is not governed by the ERISA (Employee Retirement Income Security Act of 1974). As such, you can withdraw money from your 457(b) before the retirement age of 59 ½ without being penalized. You will, however, need to pay taxes on any early withdrawals as it is considered taxable income.

Second, and perhaps most importantly, 457(b)s allow you to make a catch-up contribution of up to $45,000 in 2023 (Up from $41,000 in 2022). This is the case if you are due to reach 59 ½ in the next three years.

Traditional IRA

Traditional IRAs come with an annual contribution limit of $6,500, or $7,500 if you are over 50. You will be able to invest in most of the assets offered by your IRA broker, such as stocks, index funds, and ETFs.

As noted earlier, you will be invested in pre-tax dollars. This will enable you to invest a larger amount when making contributions. On the flip side, do remember that withdrawals from your traditional IRA will be classed as taxable income. This will be at the rate you pay taxes at the time of retirement.

I should also note that if you make a withdrawal from your traditional IRA before the retirement age of 59 ½, you will likely pay a 10% penalty. This is in addition to income tax deductions on each withdrawal. There are certain exceptions to this rule.

For example, if you’re permanently disabled or you are using the withdrawal (capped at $10,000) to buy your first home the withdrawal isn’t tax deductible .

To assess whether you qualify for a penalty-free early withdrawal, see the IRS guidance notes here.

Roth IRA

Roth IRAs come with the same annual contribution limits as traditional IRAs. The main difference is you will be investing with after tax money. Your Roth IRA contributions are made after you pay income taxes but the tax advantages are taken when you withdraw funds without the tax deduction.

This will benefit younger workers with time on their side. This is because, at the age of retirement, withdrawals from your Roth IRA are tax-free.

Roth IRAs also offer more flexibility on early withdrawals. For example, if you have had the Roth IRA for at least five years, you can withdraw your contributions at any time without paying a penalty.

You won’t pay any tax either, as you would have already paid this before making the contributions. However, if you have had the Roth IRA for under five years, a 10% penalty will apply.

Furthermore, investment gains made from your contributions will face the 10% penalty regardless of how long you have had the Roth IRA. As such, it’s best to only make early withdrawals if you have no other options.

Just like traditional IRAs, there are certain exceptions to the early withdrawal penalty on Roth IRAs.

SIMPLE IRA

While the overwhelming majority of IRAs are either traditional or Roth, other versions exist.

This includes SIMPLE (Savings Incentive Match Plan for Employees) IRAs, which are usually offered by small companies with a workforce of under 100 employees.

• Contribution limits on SIMPLE IRAs are $15,500 or $19,000 if you are aged 50 and over.
• The rules on SIMPLE IRAs are much like traditional IRAs, as you will be investing with pre-tax dollars.
• Employers will usually match SIMPLE IRA contributions by up to 3%.
• However, withdrawing money from a SIMPLE IRA within two years of opening it will result in a 25% penalty. This is in addition to income tax.

Ultimately, if you work for a small employer, you might need to opt for a SIMPLE IRA if this is the only option available to you.

SEP IRA

SEP (Simplified Employee Pension) IRAs are usually set up by small employers on behalf of employees. This is because they provide employees with certain tax benefits.

SEP IRAs are beneficial, as employers must match contributions up to a certain amount each year. This is determined by the success and growth of the business.

Moreover, SEP IRAs come with higher contribution limits than traditional and Roth IRAs. This is the lesser of $66,000 in 2023 or 25% of the employee’s compensation.

One of the main drawbacks of SEP IRAs is that catch-up contributions for over 50s are not permitted.

Rollover IRA

Rollover IRAs are used when you wish to transfer an employer-sponsored retirement plan because you no longer work for the company. In doing so, you will maintain the tax benefits that you have accrued.

Do note that you will only have 60 days to move the retirement account out of the Rollover IRA and into a new plan. If you don’t, penalties will apply.

Spousal IRA

Spousal IRAs are aimed at married couples that have uneven income limits. Put simply, if one of the two partners is earning little to no income, a Spousal IRA provides more favorable tax benefits.

The specifics of a Spousal IRA work much the same as a traditional or Roth IRA in terms of income limits and withdrawals. However, filing is done on an individual basis, rather than jointly.

Payroll deduction IRAs

Payroll deduction IRAs enable workers to contribute to their retirement savings in the event their employer doesn’t offer a plan.

They operate much like 401(k)s, as you can instruct your employer to make contributions from your salary. However, annual contribution limits are the same as traditional and Roth IRAs, at $6,500 ($7,500 for the over 50s).

Payroll deduction IRAs are generally offered by very small business owners.

Check if your employer offers a sponsored plan

First and foremost, your options might be limited by what your employer currently has in place. For instance, if your employer doesn’t offer a 401(k), then you will need to consider one of the IRAs I discussed above.

If your employer does offer an employer sponsor retirement plan such as the 401(k) plan, this is almost always the best option. For instance, you will have access to much higher contribution limits. In 2023, this is $22,500 per year as opposed to the $6,500 available with traditional IRA or Roth IRA.

If you are over 50, you can make catch-up contributions of up to $7,500 annually with a 401(k) but usually just $1,000 with an IRA.

Additionally, many employers will make matching contributions to a 401(k) plan. This varies from one company to another, but commonly, 50 cents for each dollar contributed will be matched, up to 6% of your salary.

• In this scenario, let’s say that your salary is $60,000
• Your employer will match up to 6%, so that’s $3,600
• If you contribute this amount, your employer will it by 50 cents on the dollar
• As such, your employer contributes $1,800 to your 401(k)

As per the above, you have essentially received $1,800 from your employer as free money. This money will continue to grow for as long as your 401(k) is active.

Traditional 401(k) or Roth 401(k)

If your employer offers a 401(k) matching contribution, then this should be your first port of call. With that said, many employers offer two options in this regard, a traditional or Roth 401(k).

There are many factors to consider in this regard. But overall, whether you opt for a traditional or Roth 401(k) should be determined by the number of years you plan to continue adding to your retirement savings.

• For example, if you have several decades before you plan to start making withdrawals from your 401(k), then a Roth is almost always the best option.
• As I briefly noted earlier, you will make contributions with dollars that have already been taxed.
• Therefore, after you turn 59 ½, you will enjoy tax-free withdrawals from your 401(k), you don’t pay taxes on these withdrawals as they are not seen as taxable income, you paid the tax when you paid your employee contributions.

If you don’t have many working years left, however, you might be more suited for a traditional 401(k).

Taking into account the additional $7,500 in annual catch-up contributions, this will allow your savings to grow faster. You will, however, pay tax when you make withdrawals from your traditional 401(k).

Alternative employer plans

If you work for an employer outside of the private sector, then you might have access to an alternative workplace retirement plan. For example, if you work for a state or local government agency, you should be able to set up a 457(b) plan.

You will have access to the same limits as a 401(k) and, in some cases, be able to make early withdrawals without paying a penalty. Additionally, you can make much higher catch-up contributions if you are due to reach the age of retirement in the next three years.

Similarly, if you work for a public school or university, your employer will likely offer you a 403(b) plan. Once again, this follows the same limits as a 401(k). You will be able to make higher catch-up contributions too.

Other non-profit occupations are also eligible for a 403(b) plan, such as church employees.

No employer-sponsored plans

If you work for an employer that does not offer a 401(k), 457(b), or 403(b) plan, then you will likely need to turn to an IRA.

One option is to ask your employer to set up a payroll deduction IRA. While this will enable you to make deductions from your salary, limits are capped at $6,500 ($7,500 for the over 50s). SIMPLE IRAs are also an option, but your employer would need to set this up for all employees at the company.

You could also open an IRA directly with an online broker. This will enable you to make your own investments, and you will have access to a much wider range of assets.

High earners

If you are a high earner and you are actively contributing to your retirement savings, you might be in a position where both a 401(k) and an IRA make sense.

This is certainly the case if you have maxed out your 401(k) contributions for the year and wish to save additional funds. In this scenario, you could then switch over to an IRA.

You could then switch back to your 401(k) when the new tax year starts and the limits have been reset.

For example, if you do not have any employees other than your spouse, then a Self-Employed 401(k), also known as a solo 401(k) might be the best option. This enables you to contribute the lesser of $66,000 in 2023 or 25% of your gross income into your retirement account..

You can contribute another $7,500 if you are over the age of 50. Moreover, you can choose from a traditional or Roth plan.

If you have a small number of employees, then a Self-Employed 401(k) will not be suitable. Instead, you can opt for a SEP IRA.

As noted earlier, this also permits the lesser of $66,000 in 2023, or 25% of your gross income. However, catch-up contributions are not allowed if you are over 50.

For example, if you have an employee-sponsored retirement plan, then you will likely only be able to invest in a small selection of index funds. This will usually include major indices like the S&p 500 and Dow Jones.

If your retirement plan is offered by a publicly-listed company, you might also be able to invest in its stock.

On the other hand, if your retirement plan comes in the shape of an IRA, you will have access to a considerably larger pool of investments. In addition to index funds, this can include thousands of US and international stocks, commodities, and even cryptocurrencies.

This will vary from one broker to the next, so you will need to consider which investments you want access to before opening a retirement plan.

In terms of strategy, this will depend on your tolerance for risk and ultimately – your age. Generally, younger savers will invest in slightly riskier assets. Older savers, however, will focus on low-risk markets, such as bonds and CDs.

Conclusion

In summary, I have discussed a range of retirement accounts available to US savers. There are many factors to consider, including whether or not your employer offers employer sponsored retirement plans. If not, then you will likely need to opt for an IRA.

Crucially, it is best that you speak with a qualified advisor when assessing retirement accounts for your personal circumstances. It is important that you make the right decision from the get-go to ensure that you maximize your retirement savings.