A Senior’s Guide to Retirement Account Options


When it comes to health and safety, many seniors make solid plans. They make sure their homes are appropriately set up with aging in place solutions as they get older. They diligently replace the batteries in their smoke detectors. They wear their medical alert pendants at all times, even in the shower. If you are someone who takes care to protect yourself, why shouldn’t you protect your precious golden years by investing in your retirement?

A study from The Motley Fool found that retirement funds are popular in the United States, with about 55% of non-retirees holding one, including 62% of those aged 18 to 29. But in 2019, the average American had only $65,000 in retirement savings, and 28% of young individuals felt they were on track to save for retirement[1]. And they might be right: according to USA Today, it can cost between $858,000 and $1.5 million to retire comfortably, depending upon where you reside in the U.S.

So it’s quite important to have your best personal finance program for retirement. The U.S. Census Bureau found that 50% of women aged 55 to 66 have no personal retirement savings, and 47% of men are in the same boat. It’s also important to remember that social security payments, while a nice bonus of finance help for seniors, won’t come close to covering all expenses. To put it in perspective, the average monthly security benefit for retired workers in 2022 was expected to be $1,657 per month. That’s only $19,884 per year[2].

Choosing your retirement options right now, no matter your age, and putting the maximum amount you can contribute into that account will help you retire more comfortably when the time comes. But how do you choose from among all the plans out there? That depends on how you want to handle taxes and withdrawals.

According to American Express, there are three ways in which the various plans differ:

·         Some ask you to pay taxes on the money up-front, while others defer the tax until you withdraw the money.

·         Some have higher limits on what you can save each year.

·         Some have rules about when you can withdraw the money and penalties if you withdraw it sooner.

The Retirement Options

When you think of retirement accounts, you likely immediately think of the 401K. Offered by employers for decades, the 401K account has become a staple of the working world. But there are many other account options available, including those for self-employed, business owners, or those with complex financial situations. Here’s a quick rundown of what you can opt into[3]:

·         401K. If you are employed by someone, this is a very easy option; you simply choose how much you want to contribute from each paycheck and your employer funds the account before your paycheck gets to you. In many cases, the employer offers matching contributions, so your money grows faster. The investment options might be limited, however, and it could take several years before you fully “vest” and own those matching contributions. When you contribute to a 401K, your taxable income is reduced. You won’t pay taxes on your money until you take it out of the account. You can start taking money out of the account without penalty after the age of 59 ½, and you’re required to start withdrawing money from the account at the age of 72.

·         Traditional IRA. This is available to anyone, regardless of any other retirement accounts you might have or what your working situation is like – as long as you have taxable income, you’re probably eligible for a traditional IRA. The term IRA stands for “Individual Retirement Arrangement,” which makes it clear this is a very personal, hands-on option. The traditional IRA offers numerous plan options for investment but doesn’t allow as high of a contribution every year as the 401K does; in 2022, the maximum contribution for a traditional IRA was $6,000, and it went up to $7,000 if you were 50 or older. The same age restrictions for withdrawals apply to the IRA as they do to the 401K.

·         Roth IRA. The Roth IRA is a bit more complicated but might be better if you intend to withdraw money before you reach a certain age. You can withdraw your retirement savings tax-free and might pay less tax overall. However, you don’t get a tax break on the front end when you fund the account. Choosing a Roth IRA versus a traditional IRA involves a bit of looking into a crystal ball – you’re betting that your tax rate will be higher at retirement age and that paying your taxes on the money right now is the best bet for a higher return on investment. You can often withdraw money well before the 59 ½ age threshold, and you don’t have to start withdrawing at age 72. If you’re curious about the other ways these plans differ, the Internal Revenue Service offers a handy comparison table.

·         SEP IRA. If you run a small business or are self-employed, this might be the one for you. SEP stands for “simplified employee pension.” This IRA is designed for small business owners and allows them to provide a retirement option with high contribution limits and immediate vesting. This is a good option when it’s too expensive to offer a 401K. If you are an employer, you can contribute up to 25% of each employee’s income to the fund (up to $61,000 in 2022), and you can contribute the same for yourself if you are self-employed. Employer contributions are immediately vested, so there’s no waiting to get that extra money.

·         Simple IRA. This is a dedicated plan for small businesses with less than 100 employees. “Simple” stands for “Savings Incentive Match Plan for Employees,” which makes it clear that employers are expected to contribute to this IRA, matching employee contributions of up to 3% of their salary. As with the SEP IRA, employees are fully vested immediately and can take their money with them anytime. Contribution limits for this account were $14,000 in 2022 and $17,000 for those aged 50 or older. 

·         Solo 401K. This retirement account is great for those who are self-employed or own a business with no employees. There are limited investment options, just as you would expect with a 401K, but you can contribute more to this one than to other plans, as you are contributing both as an employer and an employee. Does that sound confusing? It can be, which is why this is one of the more difficult accounts to set up. As an employee, you can contribute up to 100% of your income to the plan, up to a maximum of $20,500 in 2022 ($27,000 at age 50 or older), and then you can match your own contribution with an additional 25% of your business income. This might allow you to sock away more money than the other plans allow.

There are a few other options, though they are not as common because they apply to very specific situations[4]. For example, a 403b account is for those who work for a nonprofit or a tax-exempt organization and works similarly to a 401K. The 457b plan is available to those who work for state or local governments. There are other plans that are even more unusual; the IRS offers a list of these options. 

Another important potential option is the Health Savings Account, or HSA. This is specifically used to build funds to cover healthcare costs during your retirement years. To get this account, you must first have a high-deductible health insurance plan. In 2021, you could contribute up to $3,600 for an individual and $7,200 for a family. The big bonus about this account is that it’s tax-deductible when you set the money aside, it grows tax-free, and can be withdrawn tax-free as long as it is used to pay for a qualifying medical expense[5]. This is a strong option to consider if you already suffer from a chronic illness and expect that you will need extra medical care as the years go by.

How to Make the Choice

When choosing the best personal finance program for your retirement, look carefully at what you anticipate the future will bring. A good rule of thumb is that you will need about 80% of your current income to stay comfortable in your retirement – so if you are making $100,000 a year, you will need $80,000 per year after retirement[6].

But also keep in mind that other situations might occur that bring your cost of living a little higher than you anticipate. If you or a loved one needs round-the-clock nursing care at some point or even a professional caregiver while aging at home, that’s an expense that you might not have counted on – but you should consider it, just in case, because it’s much better to prepare now than scramble later.

When choosing an appropriate retirement account, get those who are most likely to be affected involved. This usually includes your spouse, as they will be the ones who handle the finances if something happens to you. But it might also be your children, siblings, or even a family caregiver. These chosen individuals will need to know how much money is there, how it is invested, how some of it might be earmarked (for instance, you might have set aside a fund for aging in place home modifications), and where all the paperwork is in the event that something happens to you.

If you are just now getting serious about retirement, sit down with these loved ones and compare the wide variety of options. If you’re already invested in your retirement fund and want to expand to something else, look at those possibilities too. Which ones bring the best historical return on investment and fit your current situation?

Just as with medical alert technology, what matters is that you have it. You invest in it and trust it to be there when the time comes. If you choose an on-the-go pendant with fall detection or a medical alert watch with GPS, you’re looking at your options and making the best choice for yourself. The same is true of retirement accounts, where you are deciding which one will benefit you most in the future. Take your time in figuring that out, and never hesitate to speak to a tax professional about the options and which might be more advantageous for your personal finances and goals.