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Best Retirement Plans of 2021

Best Retirement Plans of 2021
Holly Johnson
Updated October 12, 2021
8 Min Read

The best retirement plans of 2021 make it easier to save money for the future you want. Some offer tax benefits upfront, while others give you the potential for a lower tax bill later in life. Regardless, all retirement plans are set up to help your money grow and compound until you reach retirement and get to enjoy the fruits of your labor.

This guide to the best retirement plans of 2021 breaks down some (but not all) of the ways Americans can save for their golden years. If your goal is maximizing your savings now so you can afford the retirement lifestyle you prefer, keep reading to learn more. 

Employer-Sponsored Retirement Plans

Some retirement plans are overseen by employers, and you could be eligible whether you work for a private company, a nonprofit organization or the federal government. However, each type of employer-sponsored retirement plan is geared to different types of workers, and different circumstances can apply.

401(k) 

A 401(k) plan is the most popular type of employer-sponsored retirement plan since it lets users defer part of their salary for retirement on a tax-advantaged basis. Employers are also able to contribute to employee's accounts, and many do in the form of an "employer match," which matches a set amount or percentage of an employee's contributions.

In 2021, the limit on employee elective deferrals for a 401(k) plan is $19,500. However, [some 401(k) plans](retirement plan) also permit catch-up contributions for employees who are ages 50 and older, in which case users can contribute an additional $6,500 per year for 2021.

Pros

  • Contributions are tax-deductible
  • May get matching funds from an employer
  • Generous annual limits

Cons

  • Some workplace plans have limited investment options
  • No control over fees

403(b)

The 403(b) can also be referred to as a tax-sheltered annuity or TSA plan. This type of retirement plan is typically available to certain employees of public schools, employees of eligible tax-exempt organizations, and some ministers. The 403(b) plan lets users defer some of their salary, yet employers can also contribute as well.

Employees who use a 403(b) plan for retirement can only contribute up to $19,500 of their salary in 2021. An exception is for anyone who is ages 50 or older, in which case they can also make additional catch-up contributions of up to $6,500 for 2021. 

In addition, there are limits on how much the employee and employer can contribute. This limit is set at the lesser of $58,000 in 2021, or 100% of the compensation for the employer's most recent year of service, per the Internal Revenue Service (IRS).

Pros

  • Tax advantages on contributions
  • High contribution limits
  • Potential for matching funds from employer

Cons

  • Some 403(b) plans have limited investment options
  • No control over fees
  • Not always subject to Employee Retirement Income Security Act (ERISA) protections

457(b)

The 457(b) is a defined contribution plan that is available to certain state and local governments, as well as non-governmental entities tax exempt under IRC Section 501. This type of plan lets employees contribute to their retirement on a tax-advantaged basis, and like with other tax-advantaged plans, money is able to grow tax-free over time. The 457(b) also allows employers to contribute to the plan.

In 2021, contributions to a 457(b) plan cannot exceed the lesser of 100% of the employee's compensation or $19,500. Some plans, depending on the administrator, may also allow for catch-up contributions for employees who are ages 50 and older.

Further, specific plans offer special catch-up provisions for those who are within 3 years of traditional retirement age. If this benefit is offered, participants may be able to contribute up to the lesser of $39,000 total, or the "basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)," according to the IRS

Pros

  • No 10% tax penalty on early withdrawals
  • Double catch-up limits

Cons

  • Only available to select occupations and employees
  • Not a qualified retirement plan

Thrift Savings Plan

The Thrift Savings Plan (TSP) is available to federal employees, and it lets eligible workers contribute to retirement on a tax-advantaged basis. People who can use a TSP get the chance to defer a portion of their income for retirement, receive matching contributions, and reduce their taxable income in the year they contribute.

In 2021, employees can defer up to $19,500 of their salary to a Thrift Savings Plan. However, individuals ages 50 and older can also contribute an additional $6,500 in catch-up contributions.

Further, employers can also contribute to this plan. The maximum amount for all contributions from employees and an employer works out to $58,00 in 2021. 

Pros

  • Generous contribution limits
  • Plans tend to come with low fees
  • Tax advantages

Cons

  • Only available to government employees
  • Complex rules for withdrawals
  • May have limited investment options

Retirement Plans for the Self-Employed

Freelancers, entrepreneurs, and small business owners have their own selection of retirement plans to choose from. Retirement plans for the self-employed tend to have extremely high contribution limits, and most offer tax advantages in the year you contribute.

Solo 401(k)

A Solo 401(k) is also known as a one participant 401(k) plan. To be eligible for a Solo 401(k), you must have some sort of business or self-employment income. If you own a business, you also need to be the only employee with the exception of a business partner (or partners) or a spouse. 

Individuals with a Solo 401(k) can contribute on both the employee and the employer ends of the spectrum. Employee contributions are limited to up to 100% of compensation or $19,500 in 2021, except for those who are ages 50 and older who can contribute up to $6,500 in additional catch-up contributions. On the employer side, participants can contribute what is generally seen as 25% of compensation as defined by the plan with a maximum cap of $58,000 in 2021 for total contributions (not counting catch-up contributions).

Pros

  • Tax advantages
  • Very generous limits
  • Can open your own plan with any brokerage you prefer
  • Choose your own low-cost investments

Cons

  • More IRS paperwork than a SEP IRA
  • Requires some investing knowledge

SEP IRA

A SEP IRA is also called a Simplified Employee Pension Plan. This type of plan is available to any size business, but they are most commonly used by sole proprietorships, partnerships, limited liability companies, S corporations, and C corporations. 

Interestingly, this type of plan only allows the employer to contribute. Further, whatever percentage an employer saves for themselves is the same percentage they must save for each employee. With that in mind, the SEP IRA typically works best for solo workers or spouses who run a business together. 

Plan participants can contribute up to 25% of their net employee income with a maximum cap of $58,000 in 2021. 

Pros

  • Generous contribution caps for high earners
  • Tax advantages
  • Minimum paperwork required to use a SEP IRA

Cons

  • If you have employees, you must contribute the same percentage to their accounts
  • Employer-only contributions
  • No provision for catch-up contributions

SIMPLE IRA

The Savings Incentive Match Plan for Employees is also called a SIMPLE IRA. This type of plan aims to help small business owners with less than 100 employees contribute to their own retirement plan as well as their employees. On the employee end, workers can choose to make salary deferrals to the plan, and the employer is then required to make matching or nonelective contributions. 

With a SIMPLE IRA, you can defer all your net earnings from self-employment up to a maximum of $13,500 in 2021. If you're ages 50 and older, you can also contribute up to $3,000 in catch-up contributions. You can also contribute either a 2% fixed contribution or a 3% matching contribution, per the IRS. 

Pros

  • Tax advantages
  • Easy to set up and operate

Cons

  • Lower contribution limits than many other retirement plans
  • Mandatory employer contributions if you have employees

IRAs

Individual Retirement Accounts (IRAs) let eligible workers set aside even more money for retirement, although not everyone can use every type of IRA or deduct their contributions on their taxes. We highlight each type of IRA below, as well as rules and contribution limits you should know about.

Keep in mind that the total contribution limit for both traditional and Roth IRAs works out to $6,000 in 2021, and this limit applies to combined contributions in either or both accounts. However, savers who are ages 50 and older can also contribute an additional $1,000 in catch-up contributions.

Traditional IRA

Anyone with taxable compensation can contribute to a traditional IRA. Contributions may also be fully or partially deductible on your taxes, although it depends on your tax filing status and income. For example, your deduction is allowed in full if neither you or your spouse are offered a retirement plan by an employer. However, deductions may be limited if you or your spouse are offered a retirement plan or if your income is too high. 

Pros

  • Contributions could be tax-deductible
  • Earnings grow on a tax-free basis
  • Invest in an IRA in addition to other retirement accounts like a 401(k)

Cons

  • Pay income taxes on withdrawals in retirement
  • Lower contribution limits than other retirement plans
  • You have to open your own account and choose your investments

Roth IRA

The Roth IRA is subject to the same total annual contribution limits as the traditional IRA. However, you have to earn below a specific income threshold in order to contribute. In 2021, income phaseouts begin and end at the following limits, and those who have a modified adjusted gross income (MAGI) beyond the limits cannot contribute to this account:

  • Single filers or Head of Household: Income phase-outs begin at $125,000 and end at $140,000
  • Married filing jointly: Income phase-outs begin at $198,000 and end at $208,000

Contributions are made to the Roth IRA account in after-tax dollars, meaning there are no tax advantages in the year you contribute. However, your money is able to grow on a tax-free basis, and you can make tax-free withdrawals once you reach retirement age.

Pros

  • Money grows tax-free, and you can take tax-free withdrawals in retirement
  • Invest in a Roth IRA in addition to other retirement accounts like a 401(k)
  • No Required Minimum Distributions (RMDs) 
  • You can take out contributions (not earnings) before retirement age without a penalty

Cons

  • Low contribution limits
  • Not available to high earners
  • You have to open your own account and choose your investments

How to Choose the Best Retirement Plan

The best retirement plans that made our ranking are the most popular plans used nationwide, yet you may be eligible for other types of accounts based on your status, your employment situation, and whether you're eligible for a defined benefit plan such as a pension.

If you're in a situation where you have the option to choose your own retirement plan, here are some of the most important details to keep in mind.

Does your employer offer a retirement plan? If you're offered a workplace retirement plan like a 401(k), contributing can lower your taxable income while also helping you save for retirement. In the meantime, you may also receive a match on the funds you contribute, which is the closest thing to "free money" most of us can find.

Are you self-employed? You'll need self-employment income to be eligible for a self-employment retirement plan like a Solo 401(k) or a SEP IRA. While you'll have to do some of the work to research investments and set up an account on your own, self-employment retirement accounts tend to come with generous limits that can help you save huge sums for retirement while dramatically lowering your taxable income.

Should you open an IRA? If your income is low enough to qualify, opening a Roth IRA can help you save money for retirement that will not be taxed later on. Meanwhile, a traditional IRA also helps you set aside more money for retirement, and you may be able to deduct contributions based on your income and whether you or a spouse are offered a retirement plan at work.

To find the ideal retirement plan for the money you work hard to earn, you should compare all your options and find out which plans you are eligible to contribute to. From there, spend some time comparing the pros and cons, as well as how each plan might let you maximize your retirement savings based on your income and goals.

Ultimately, it might be best to work with a financial advisor who can guide you toward the right retirement plan and strategy based on your unique needs. Either way, arming yourself with information is the best way to get started on a path toward the retirement you've always wanted.

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