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Retirement Read Time: 2 min

The 5 retirement investments you should know about

Today’s financial landscape has a wide range of retirement investment options available. While these savings and income tools can help you retire with confidence, the sheer number of options often leave many Americans with a lot of questions.

If you’ve wondered if you need a 401(k) or an IRA (or both), or what an annuity is, keep reading.

Retirement plans:

What is a retirement plan?

  • Special investment plans or accounts that are designed to help you save money for retirement over the long term
  • They may offer potential tax advantages over a normal savings or investment account

401(k)

A company-sponsored retirement savings plan that you receive through your employer

Who is it for?

  • Employees of a company that sponsors a plan

How does it grow?

  • To start, you contribute to the plan by paying a percentage of each paycheck directly into the 401(k) account
  • Your contributions are then invested to take advantage of growth potential over time

Are there contribution limits?

  • $22,500 per year for workers under age 501
  • Workers age 50 or older may contribute an additional $7,5001
  • Visit gov/retirement-plans for the most up-to-date contribution limits

What are the advantages?

  • Traditional 401(k) contributions are deducted from your paycheck pre-tax, meaning both your contributions and earnings grow tax-deferred, allowing your plan to grow faster over time
  • Roth 401(k) contributions are deducted from your paycheck post-tax, but you pay no income tax on your investment growth when you take withdrawals after you reach age 59½ and have had your account for five years
  • Employers may match a portion of your 401(k) contributions

What are the downsides?

  • Traditional 401(k) withdrawals are taxable as regular income in the year you take them
  • Roth 401(k) contributions are made with post-tax dollars, lowering your take-home pay more than a traditional 401(k)
  • There can be a penalty for withdrawing before age 59 ½
  • You have to start taking Required Minimum Distributions (RMDs) at age 732
  • Fewer investment options than an IRA

403(b)

A retirement savings plan for employees of tax-exempt organizations, like public schools, state universities, or religious organizations

Who is it for?

  • Exclusively for employees of tax-exempt organizations

How does it grow?

  • Like a 401(k), you contribute a percentage of each paycheck directly into the account

Contribution limits?

  • $22,500 per year for workers under age 503
  • Workers over age 50 may contribute an additional $7,500 per year3
  • Workers with 15 years of service may be eligible to contribute up to an additional $3,000 per year3
  • Visit gov/retirement-plans for the most up-to-date contribution limits

What are the advantages?

  • Contributions are deducted from your paycheck pre-tax, and grow tax-deferred
  • If you work for certain employers, your contribution limits increase after 15 years of employment
  • Employers may match part of your contribution

What are the downsides?

  • Fewer investment options than a 401(k)
  • There can be a penalty for withdrawing before age 59 ½

Individual retirement account (IRA)

A special savings account that you open with a financial institution that’s designed to help you save money for retirement

Who is it for?

  • Any individual who has earned taxable income

How does it grow?

  • Like a traditional savings account, you contribute money at-will
  • Funds are invested by the financial institution according to your preferences

Contribution limits?

  • $6,500 per year if you are under age 504
  • $7,500 per year if you are over age 504

What are the advantages?

  • Contributions may be tax-deductible and grow tax-deferred
  • IRAs allow investment in a wide variety of financial products

What are the downsides?

  • Withdrawals are taxed as income
  • Deductibility of contributions may vary based on income, access to a qualified retirement plan, and tax filing status
  • There can be a penalty for withdrawing before age 59 ½
  • Starting at age 73, you are required to start withdrawing a certain amount from the account (a Required Minimum Distribution (RMD)

Roth IRA

A long-term retirement savings account where you pay taxes on the money you put in instead of the money you take out

Who is it for?

  • Any individual who has earned taxable income under certain limits

How does it grow?

  • Like a traditional savings account, you contribute money at-will
  • Funds are invested by the financial institution according to your preferences

Contribution limits?

  • $6,500 per year for workers under age 504
  • $7,500 per year for workers over age 504
  • Contribution limits are reduced if your income is above certain amounts (see disadvantages)

What are the advantages?

  • Unlike a traditional IRA, withdrawals from a Roth IRA taken after you reach age 59½ and have had your account for five years (qualified distributions) are not taxed
  • Similar wide range of available investments as a traditional IRA

What are the downsides?

  • Contributions to a Roth IRA are not tax-deductible
  • Eligibility is limited by income. For example, a single individual who earns more than $153,000 is not eligible to contribute to a Roth IRA. This limit changes based on your income tax filing status, and is adjusted semi-regularly

Annuities:

What is an annuity?

A contract between you and an insurance company where you pay a sum of money in exchange for income over a period of time, usually in retirement

Single premium immediate annuity (SPIA)

How does it work?

  • You pay a lump sum upfront for immediate, guaranteed income over an agreed upon time period

Deferred income annuity (DIA)

How does it work?

  • You pay a lump sum upfront for guaranteed income at a time in the future, usually during retirement

Fixed annuity

How does it work?

  • You can make a lump sum contribution, or pay a premium over time with a guaranteed rate of return, then receive guaranteed income when you retire

Variable annuity

How does it work?

  • A variable annuity is an annuity that works similarly to a retirement account
  • You can make a lump sum contribution, or pay a premium over time with a rate of return that varies with market investments like stocks, then receive income based on your accumulated value when you retire
  • Variable annuities have a potentially higher upside but also higher risk — you can lose money on a variable annuity

Index annuity

How does it work?

  • You can make a lump sum contribution, or pay a premium over time with a rate of return that varies with the index performance (but never less than zero), then receive guaranteed income when you retire.
  • Offers opportunity to benefit from market gains and protection from downturns.
  • Shares characteristics with both fixed and variable annuities.

How do I know which investments are right for me?

The exact investments or combination of investments you need to retire with confidence depends a lot on your goals and financial circumstances. The best way to get it right is to talk to a financial professional. They can help you align your goals with the retirement strategy that can get you to them! Set up a meeting to discuss your retirement options today.

SOURCES:

As of 2023; Source: Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits, IRS.gov, accessed April 2023

Under the SECURE 2.0 Act, starting in 2024, RMDs are not required from Roth 401(k)s.

For eligible employees only; visit source for more information. Source: Retirement Topics – 403(b) Contribution Limits, IRS.gov, accessed April 2023

As of 2023; Source: Retirement Topics – IRA Contribution Limits, IRS.gov, accessed March 2023

DISCLAIMERS:

All guarantees are backed exclusively by the strength and claims paying ability of the issuing insurance company.

All investments contain risk and may lose value.

Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.

Neither Guardian, nor its subsidiaries, agents, or employees provide tax or legal advice. You should consult with your tax and legal advisor regarding your individual situation.

2023-152349 (Exp. 3/25) *pre-approved content*

 

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