There are several types of accounts designed to help you save for retirement. Most people have at least heard of traditional and Roth IRAs, but there are some lesser-known retirement accounts, as well -- especially for self-employed individuals. Because one of the best things to do when researching your options is to find out what the experts do with their own money, we asked three of our contributing writers to discuss how they're saving for retirement.
Matt Frankel: I have a few retirement accounts, including some rollover IRAs from previous employers, but the two that I still actively contribute to are my SEP-IRA and Roth IRA. A SEP-IRA is an excellent choice for self-employed individuals, and has a generous contribution limit -- 25% of annual earnings. Admittedly, I don't set aside quite that much, but it's nice to have the option.
A SEP is structured similarly to a traditional IRA. I can use the money in my account to buy virtually any publicly traded stock, bond, or mutual fund I want, and the investments grow tax-deferred. My contributions are deductible from my taxable income, but I'll eventually be required to pay taxes on my withdrawals in retirement.
I maintain a Roth IRA, as well, because I feel its benefits complement those of my SEP nicely. Specifically, I can't deduct my contributions to my Roth account, but my eventual withdrawals in retirement will be tax free. So, I'm effectively "locking in" my current tax rate.
Additionally, contributions to a Roth IRA -- but not my investment gains -- are free to be withdrawn at any time without penalty. On the other hand, my SEP contributions will have to stay in the account until I turn 59-1/2, or I face a 10% early-withdrawal penalty from the IRS. While I hope I won't need to access my Roth contributions early, it's nice to have the option in case I need it.
Finally, the Roth IRA has no required minimum distributions in retirement, no matter how old I get. I plan on saving more than enough to live on in retirement, so the Roth gives me the option to allow some of my investments to grow and compound tax free for an indefinite length of time.
Jason Hall: I have a self-employed 401(k), a Roth IRA, and traditional IRA. Why do I have all these accounts? In short, because life changes.
Your income, tax situation, and how much you can contribute are all going to change -- maybe several times -- between now and when you retire. Between the accounts I have now, I'm well-positioned for those changes.
I contribute almost exclusively to my 401(k) today, and for most people, an employer's matching contribution makes a 401(k) the best place to start. This is also the account that gives you the largest amount you can personally contribute -- $18,000 in pre-taxed employee contributions in 2015, and a total of $53,000 including employer contributions. Roth and Traditional IRAs are capped at $5,500 in 2015, plus some additional "catch-up" contributions for those 50 and over.
I have a traditional IRA, which I used to rollover 401(k)s from prior employers. Most people will have multiple employers before they retire, and consolidating your 401(k)s to a single IRA will reduce costs and help you track your nest egg. Plus, high-income earners who don't qualify for a Roth can still contribute to a traditional IRA, and benefit from the tax-deferred growth.
Matt mentioned the Roth as a great way to get tax-free income in retirement, but it's important to determine whether you're better off reducing taxes today, or in retirement. In past years, I've contributed to a Roth, but my current tax status suggests I'm better off putting more in my 401(k) first. In coming years, that could change, and I'll begin contributing to the Roth again.
Brian Stoffel: While I already have contributed to a Traditional and Roth IRA for my family, we use a Health Savings Account (HSA) to help us prepare for retirement, as well. Anyone who has a high-deductible health insurance plan is eligible to use an HSA.
Unlike flexible spending plans that your employer may offer, the money you put into an HSA doesn't disappear at 11:59 PM on December 31st -- you get to keep it for as long as you like. But the real advantage of HSAs is that the money you put in is tax deductible, the growth it experiences is untaxed, and the distributions -- so long as they are used to pay for qualified medical expenses -- are untaxed, as well. You won't find an account with this kind of triple-tax-advantage anywhere else.
The traditional strategy is to invest your HSA money now -- and withdraw it to pay for medical expenses in retirement. A more complicated approach involves three steps. First, you invest your HSA contributions immediately. Then, you pay for your medical expenses out of pocket, saving the receipts. Then, when retirement comes along, you can reimburse yourself for those earlier payments.