Types of Retirement Plans: All You Need to Know to Save the Smart Way

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Last Updated on: 27th August 2024, 09:34 pm

There are many types of retirement plans, and some are for more specialized account holders than others. We are going to go over the main ones and their variations. Some accounts only let you hold traditional assets like stocks, bonds, and long-only funds.

However, other types of retirement plans allow you to invest in all types of alternative assets such as precious metals, real estate, or cryptocurrencies. You may want to find out more about your options and which accounts you are eligible for. 

Note that some types of retirement plans are only available to the self-employed, or business owners, while others are only available to employees.

Types of Retirement Plans

Let's get into more detail about all the types of retirement plans on our list. Things like who is eligible, retirement contribution limits, and distribution obligations. 

401(k) Plan 

A 401(k) is a defined contribution plan where employees defer a percentage of their compensation to the retirement plan. Often, employers will match that percentage as a job perk and motivate remaining at the firm.

All employer contributions to the 401(k) have a vesting period. So, employees who leave the company before the funds are fully vested will forfeit those funds. Money deferred to the retirement plan are tax-deductible and investments inside the plan grow tax-free.

You also have a Roth option which allows employees to contribute after-tax dollars to the plan. Investments grow tax-free while in the plan, but there is no income tax to pay when taking distributions. You will also not be required to take a minimum distribution at the age of 72.

Solo 401(k) Plan

This plan is the same as 401(k) for employees but is designed to allow self-employed workers and unincorporated business owners to save for retirement with the advantages of a 401(k) plan. In this plan the self-employed or business owner acts as employer and employee when making contributions.

For a business owner or self-employed person and their spouses to maintain a Solo 401(k)s, or One-Participant 401(k)s, they are not allowed to hire any employees. Apart from this feature, these types of retirement plans function in the same way as a 401(k).

457(b) Plan

This plan is sponsored by non-profit or government organizations and is intended for upper-level management only. The plan is considered a deferred compensation plan which offers a tax-enhanced environment for retirement investing.

Contributions to this plan are made tax-free and investments inside the plan grow free of taxation. The ongoing income tax rate will apply once you take distributions.

Traditional IRAs Plans

Individual Retirement Accounts were first established in 1974, to accumulate funds for retirement. You may make contributions to the IRA up to the contribution limits set by the IRS. However, you are not under any obligation to pay funds into the IRA if your needs change any given year.

The cash you contribute to the fund is tax-free and investments inside the IRA plan grow tax-free also. Tax is paid at your going income tax rate when you take distributions. There is also a Roth IRA, which allows you to make after-tax contributions to the plan. 

Your investments grow tax-free inside the plan, however, you will not pay any income tax at retirement. And you are under no requirement to take minimum distributions at any age.

Gold IRA Plan

A gold IRA works in the same way as a traditional IRA with some added features. Traditional IRAs have limitations on what types of assets you can hold within the plan. Gold IRAs broaden this aspect in a big way.

As you can imagine from the name, gold IRAs allow you to hold precious metals that the IRS considers bullion. This includes gold, silver, platinum, and palladium bars and coins. Gold collectible coins and other precious metals numismatics are not allowed. 

Self-Directed IRA

Self-directed IRAs function in the same way as traditional IRAs however they have the option of allowing you to invest in a broad range of alternative assets. You can invest in stocks, bonds, and traditional funds. 

However, you may also hold real estate, actively managed funds, precious metals, commodities, and cryptocurrencies. For cryptocurrencies, it's wise to use the specialized services of a cryptocurrency IRA company. Investing in crypto involves many features that are only taken care of by specialized companies.

SEP (Simplified Employee Pension) IRA

SEP IRAs allow employers to make non-salary deferrals to a retirement plan for themselves and their employees. The main difference to a traditional IRA is that only the employer makes contributions to these types of retirement plans. 

The money paid into the IRA is vested in full from day one. And the employee has the responsibility of making investment decisions. Each employee must have a separate SEP IRA set up for them, the employee must be over the age of 21. And must have worked for the company in 3 of the last 5 years.

Thrift Savings Plan (TSP)

The Thrift Savings Plan is available to government employees and members of the armed forces. Government employees fund these accounts with pre-tax dollars from their paychecks. The funds are held by the Thrift Savings Fund and administered by a five-member board, appointed by the President of the United States.

These types of retirement plans work in the same way as a 401(k) in the private sector. However, investment choices are more limited. The Thrift Savings Board allows plan participants to choose from several funds with different levels of risk. And individual stocks or bonds are not allowed.

Profit Sharing Plan

Profit Sharing Plans allow employers to make contributions to employee retirement plans based on the profitability of the company. These funds are paid on top of the employee’s salary, if the employee defers compensation to a retirement plan it is considered a 401(k).

The calculation of the contribution to the fund is determined by the employer on a “comp to comp” basis. This means that the employees receive a percentage of the employer’s contributions based on the employee’s compensation relative to the total compensation of all employees.

All funds are paid into the plan on a tax-deferred basis, while investments grow inside the plan tax-free. And income tax is paid at the going rate when the employee takes distributions.

Keogh Plan

Keogh plans allow the self-employed and sole proprietors to set up savings accounts for their retirement. They are especially suitable for professionals such as doctors, lawyers, or financial professionals. 

You can choose among three different types of retirement plans, each with its own contribution limits. The plan you choose will depend greatly on your objectives. Keogh Plans do not have a Roth option, you may only contribute pre-tax dollars.

Types of Keogh Retirement Plans

• Profit Sharing Plan
• Defined Benefit Plan
• Money Purchase Plan

Profit Sharing plans allow you to choose each year how much you want to contribute. The limit for 2022 is the lesser of 25% of income or $61,000 plus a $6,500 catch up if you are over 50. 

For Defined Benefit Plans your contribution limits are set by the amount you wish to receive at retirement. You must make quarterly contributions to receive a maximum of $230,000 or 100 percent of the highest 3 consecutive years of income.

Money purchase plans require that you set a percentage of your income to contribute to the plan. The maximum is 25 percent, and you will be subject to a penalty if you do not contribute the established amount.

Money Purchase Plan

Money Purchase Plans allow employers to set up larger types of retirement plans for eligible employees. The amount must equal a percentage of the employee's compensation and both employer and employee must make contributions yearly. 

These plans allow for a much larger savings account as the yearly limit may be higher than for a 401(k). However, they also come with higher administrative costs, and you will face a penalty if contributions are not met.

ESOP (Employee Stock Ownership Plan)

An ESOP is a tax-efficient way for employees to receive stock ownership of the company they work for. The stocks are transferred to eligible employees’ accounts and are not taxed as income. The company is also able to deduct the value of the stocks it contributes on its tax statement.

All stock and cash contributions have a vesting period, between 3 to 6 years. If the employee leaves the company, vested stocks will be delivered, and the company must purchase them at a fair price.  

SARSEP (Salary Reduction Simplified Employee Pension)

Salary Reduction Simplified Employee Pension plans were superseded by SEP IRAs as of January 1, 1997. However, employers who established a SARSEP before January 1, 1997, may still use them as per IRA guidelines. Employees must have worked for the employer for at least 3 of the past 5 years.

SARSEPs are subject to a participation test. This means that at least 50 percent of employees must choose to make elective deferrals to the plans. If that quota is not met all deferrals for that year must be withdrawn from the plan. 

Bottom Line

As we have seen there are many types of retirement plans, and many are available side by side. However, most of them don’t allow holding precious metals. You may want to consider adding precious metals to your retirement savings, a tax-efficient way to do this is with a gold IRA company.