There are multiple retirement saving options and no one option fits everyone. Here in this post, I will try to talk about multiple options and you can choose which fits you better.
401k
This is the most common retirement savings option for employees where the employer provides a 401k plan through an investment company like Fidelity or Vangaurd.
How it works?
Every year IRS sets the limit and gives you the option to save pre-tax amount into an employer-sponsored 401k plan, for FY21 that limit is $19500 for the people below age 55, for the people above 55 IRS allows you to catch up on retirement saving for FY21 that catchup amount is $6500.
Some employers match the employee contribution, so the IRS limit for employee + employer contribution for FY21 is $58000.
The amount you contribute is not taxed for that fiscal year, it will be taxed at the time of withdrawal.
If you withdraw money from 401k before the age of 59.5 you will be charged a 10% IRS penalty unless you have economic hardship.
IRA (Individual Retirement Account)
IRA is more likely similar to 401K. Instead for a traditional IRA, you don’t need your employer to provide this option, you can open a traditional IRA account and put your money directly into the account which will be tax-deductible.
The limits vary for IRA account the maximum individual can contribute to this account for FY21 is $6000. The limits vary if you also participate in the employer sponsored 401K plan.
Example: If a person participates in the employer-sponsored 401k plan and want to participate in the traditional IRA savings, he/she will be eligible to take full deductions for IRS limit only if his/her Modified Adjusted Gross Income(MAGI) is $66000 or less and for couples, the MAGI should be less than or equal to $105000. From that point the tax-deductible amount he/she might contribute to IRA reduce until their income reaches $76000 for singles and $125000 for couples, after that they wont be eligible for tax-deferred contributions to their traditional IRA.
The person is taxed at the time of withdrawal on the earning and investments, like 401K there is a 10% penalty if you withdraw earlier before 59.5 years of age.
ROTH IRA
This is similar to IRA where you can contribute outside of your workplace retirement plan or if they offer through your employer. The main difference between traditional IRA and ROTH IRA is the amount you contribute to ROTH IRA is TAXED at the time of contribution, and it won’t be taxed at the time of withdrawal even on the capital gains you might get.
The contribution limit for FY21 is $6000 if you are 50 and below and $7000 above age 50.
You are not eligible to contribute if your annual income exceeds $140000 as an individual or $208000 as a family.
The withdrawals from ROTH IRA are tax free and penalty free unlike the other two plans.
HSA(Health Saving Account)
This is not a retirement plan but helps you during the retirement or anytime before the retirement for any health emergency.
HSA plans are sponsored mostly by the employer when you enroll in one of their high deductible medical insurance plans.
HSA as three time tax benefit, the money you contribute to HSA is tax free, the money grows tax free and when you withdraw the money for medical needs it is tax free you will be never be taxed on this money as long as you use it for medical reasons or HSA authorized purchases.
The IRS limit for HSA contributions for FY21 is $7100, both employee and employer contributions combined.
It is wise to contribute to HSA as most people might need money for medical expenses during retirement.
| PRE TAX | TAXED WHILE GROWING | TAX ON WITHDRAWAL | PENALTY | |
| 401K | YES | NO | YES | YES |
| IRA | YES | NO | YES | YES |
| ROTH IRA | NO | NO | NO | NO |
| HSA | YES | NO | NO(For HSA Approved) | NO(FOR HSA Approved) |