This article, written by Eric Rosenberg, originally appeared on Betterment.
With the decline of defined benefit plans (e.g., pensions), saving for retirement is something most Americans are left to figure out on their own. It doesn't have to be complicated, but it does require some planning to figure out what kind of account--or combination of accounts--will work best for you and your family. If you're wondering how to save for retirement with the right investment account, start your planning here.
401(k)
The first place to look for retirement accounts for any full-time employed individual is your company's 401(k), or other defined contribution plan such as a 403(b).
There are several reasons these plans are the place to start:
Contributions are made with pre-tax income and lower your year-end income tax bill.
Your company is likely to automatically enroll you in an investment offered under its 401(k) plan. Most companies allow you to adjust the default investment and contribution percentage.
Your employer may offer you a matching contribution up to a certain amount.
Starting in 2015, the maximum you can contribute to a 401(k) is $18,000 per person, or $1,500 in pre-tax dollars per month. If you are 50 years old or older, you can contribute an additional $6,000 in 2015 for a total of $24,000 per year.
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Remember that the contribution limit is per person. For couples, even if one member of the family earns far less than the other, he or she can still contribute up to the full amount of their income until they reach the maximum. Together, a couple can save $36,000 across two 401(k) plans each year before age 50--and then that upper limit jumps to $48,000 when they are 50 or older.
These rules also apply to 403(b) and 457 plans if you work for some non-profit or government employers. Also, remember that when you leave your employer, you can roll over the entire balance into an IRA and direct your investments yourself.
When you eventually withdraw money from your 401(k) in retirement, you will pay income tax on your savings.
Roth 401(k)
Many employer-sponsored plans now offer a Roth 401(k) option--it's similar to the above 401(k) with the same contribution limits. However, with the Roth your contributions are made with post-tax dollars. In other words, you pay the income tax now--and can withdraw these funds tax-free in retirement.
Traditional IRA
Anyone can contribute to a Traditional IRA, but your income level and whether or not you also contribute to a 401(k) will determine if you can also get a tax deduction for the year of your contribution. In 2015, you can contribute $5,500 if you are under 50 or $6,500 if you are 50 or older.
If you contribute to your workplace plan, you can determine if you will be able to get a deduction with these IRS guidelines. If you don't contribute to a workplace plan, you can get a full deduction on your income taxes.
Remember, your 401(k) contributions lower your pre-tax (or gross) income, so if you are the sole breadwinner and your family's gross income is more than $191,000, maxing out your 401(k) could result in lowering your income enough to allow you to fully participate in an IRA.
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Unlike a 401(k), IRA contributions are based on family income, not individual income. If only one spouse is working and has access to a workplace benefit plan, as long as your family's total gross income is lower than $191,000 per year, you can contribute to an IRA for partial or full deduction. (See IRS guidelines for spousal IRAs.)
Traditional IRAs are also a good option to roll over an old 401(k). Why roll over? You might want to consolidate your investments with a manager for lower fees and better investment options than what your old 401(k) provider offered.
Learn more: Compare investment managers.
There are a few reasons you might hold off on rolling over, however. One example is if your old 401(k) has company stock in the plan which could mean a different (and potentially more expensive tax situation) than simply rolling over investments. If this is the case you should consult a tax professional; Betterment is not a tax advisor, and this should not be construed as tax advice.
Roth IRA
Unlike Traditional IRAs and 401(k)s, Roth accounts allow you to pay the taxes up front--and withdraw your money tax-free down the road.
To be eligible to contribute to a Roth, you must have earned at least some taxable income in the calendar year and your eligibility phases out once you start earning between $114,000 and $129,000 for an individual. The limit if you're married and filing jointly is $191,000.
If you're a high earner, you can take advantage of a Roth by using a Roth 401(k) or by converting money from a Traditional IRA into a Roth. (Learn more about the Roth IRA rules for a conversion.)
If you're looking to roll over an old 401(k) and trying to decide between a Traditional and Roth, that decision is likely to come down taxes. Many people roll over a 401(k) into a traditional IRA to avoid a tax bill in the current year.
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Another perk of a Roth is that it can also double as your down payment savings if you're planning to buy a house--the IRS permits a total of $10,000 to be withdrawn from your Roth IRA toward your first home, without penalties. You can have both a traditional and a Roth IRA, but you can only contribute a max of $5,500 across both accounts each year.
HSA Account
An HSA is a health spending account and essentially functions like a traditional IRA account (contributions are tax deductible) for healthcare spending, including doctor visits, prescription medications, dental and eye care, and related costs.
The funds roll over from year to year and can only be used on health spending--tax-free. However, whatever you don't spend on medical care by the age of 65 you can withdraw and use like any other money (which is taxed similar to a traditional IRA).
The maximum contribution for a family is $6,650 and $1,000 higher if a family member is 55 or older. For an individual, that amount is $3,350. However, you can only use these accounts if your health plan is considered a high-deductible plan, or one that has a deductible of $1,300 for individuals and $2,600 for families.
You can more details about these accounts by reading The Truth About HSAs and Retirement.
This article is an overview of potential options. You should consult a tax professional about your personal situation. Betterment is not a tax advisor, and this should not be considered tax advice.
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