WIth all the different retirement vehicles out there, it can be extremely confusing to figure out how to start saving for retirement. Do I use an IRA? What about a 401K? How come my teacher friend has a 403b? What do all these confusing numbers and letters mean!?!!? Don’t worry, I am here to map out the majority of the retirement vehicles that are available and to give you a big picture view. Once you have this big picture view, the retirement vehicle landscape will become much clearer. If you haven’t even thought about saving for retirement, you need to read this post here.
When I first started working, learning about all the retirement options out there was tremendously confusing. Retirement vehicles were certainly not something that is taught in school. Generally, only your accountant or financial advisor would be familiar with all the different options out there. However, I realized the importance of learning about these vehicles for myself to ensure a successful retirement.
You can always own an IRA (individual retirement account) and contribute to it as long as you are below a certain modified adjusted gross income level ($131,000 for singles). An IRA is an account that you, and only you own. You can take it with you regardless of whom you work for. On the other hand, company sponsored plans such as 401K, SIMPLE IRA, SEP, defined benefit plans, and profit sharing plans are part of the company you work for. You no longer contribute to it once you leave the company. Most times, you won’t even have a choice on what the company sponsored plan is since it has already been set up. If you own your own business, you can be in the situation that allows you to form a company sponsored plan, but it’s ultimately owned by you since you own the business. See the image below.
I’ve outlined the majority of individually owned and company sponsored plans, how they’re implemented, and how you accumulate savings.
If you work for the government, you have a whole new set of retirement plans that you can take advantage of. Public schools use 403b, state or local governments use a 457 plan, whereas federal government employees use the FERS.
Finally, if you wish to purchase a retirement plan owned by an insurance company, you can go with an annuity. The annuity guarantees you payment until your death.
Specific details, contribution limits, income limits, etc are beyond the scope of this post. However, use this post as a starting point to dive deeper into the plans that are available to you. Use this post to provide you a high-level view of what’s available and how these plans accumulate funds for your retirement.
You can download this entire diagram as a PDF below.
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