Just the other day, I read a seriously troubling statistic regarding Americans and their strategies for retirement. According to the November 2021 Compendium of Findings About the Retirement Outlook of U.S. Workers, approximately 1 in 4 American adults don’t have a retirement strategy at all.
Why? Because they haven’t stashed away a dime for their golden years.
As in, they haven’t saved anything. Zero. Nada. Zilch.
Worse…up to 18% of Americans have less than $10,000 saved for retirement. Those are difficult statistics to believe, but I fear they are absolutely true. As Americans, we are amazing at so many things. Unfortunately, saving money hasn’t been one of our strong points.
Fortunately, there is a silver lining around the retirement shortfall most Americans will likely face.
Here it is:
It’s never too late to start saving for retirement, and there are plenty of awesome investment vehicles to choose from. Better yet, you can have more than one!
Yes! You Can Have a 401(k) and an IRA
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When the average person starts thinking about their own retirement savings, they automatically think of their work-sponsored retirement plan. For most people, that’s a 401(k) or 403(b).
If you’re self-employed, on the other hand, you probably focus your retirement savings on a SEP IRA or even a Solo 401(k).
These tax-deferred plans are usually the best place to start – not only because you can generally lower your taxable income but also because you might be getting an employer match.
If you’re not contributing to a work-sponsored plan by choice, your best bet is to contribute at least enough money to get your employer match.
After that, you should research your work-sponsored plan to find out where and how your dollars are being invested. Just because your employer offers a plan doesn’t mean they offer a great way to invest your money!
If your employer offers a stellar plan that makes the most of your dollars, you should also know you can contribute up to $23,000 to a 401(k) or 403(b) for 2024. If you are over 50 years old, however, the Internal Revenue Service allows for what is called a “catch-up contribution” each year.
Catch-up contributions up to $7,500 are permitted by certain retirement plans, including the 401(k) and 403(b), for 2024.
For self-employed plans like the SEP IRA and Solo 401(k), the rules that govern maximum contributions are a little trickier, and the amount you can contribute depends on your income that year.
For example, a SEP IRA allows you to contribute up to 25 percent of your compensation with a limit of $69,000 (but note there is no catch-up provision on this plan).
Self-employed workers who use a Solo 401(k), on the other hand, can defer up to $23,000 of their salary for 2024 to their plan (up to 100 percent of their compensation), plus another 25 percent of compensation on top of that with the same overall limit of $69,000 for 2024.
Different Types of IRAs to Consider
But remember, you can contribute to an IRA on top of your traditional retirement accounts. If you’re behind on saving for retirement like most Americans, it’s good to know you have some additional options to ponder.
There are two types of IRA to consider here, both of which are extremely different from one another:
Traditional IRAs
A traditional IRA offers another tax-deferred option when it comes to retirement savings. For 2024, you can contribute up to $7,000 to a traditional IRA, provided you don’t also contribute to a Roth IRA. If you’re aged 50 and up, however, your maximum contribution to an IRA is limited to $8,000.
Note:
The advantage that comes with a traditional IRA is that your contributions might be tax-deductible depending on whether you also contribute to another tax-deferred retirement account and your income.
IRA Deduction Eligibility
For 2024, the income limits increase slightly. For single taxpayers with an employer plan, the full IRA contribution can be made up to an income of $77,000, phasing out up to $87,000. After this point, your contributions are no longer deductible.
The income limits for married people increase slightly as well. For married filing jointly, where your spouse is covered by an employer plan, but you aren’t, an IRA contribution is fully deductible with a joint income of up to $230,000, gradually phasing out at $240,000.
So yes, that places some limitations on the tax benefit that comes with saving in a traditional IRA. Generally speaking, the limitations are only for high-earners. And even if you can’t deduct your contributions from your taxes, they can grow tax-free until you begin taking distributions.
At the end of the day, it really depends on your specific situation and your retirement goals.
Who Should Consider a Traditional IRA:
- High-Income Earners Who Want More Ways to Save for Retirement: Since there are no income guidelines that prohibit high earners from contributing to a traditional IRA, this can be a good option for people who earn more than average salaries.
Just remember, an income over $123,000 for 2024 for a married couple who files and participates jointly means your ability to deduct your contributions on your taxes might be limited.
- Mid-Range Earners Who Want to Decrease Their Tax Liability: Mid-level earners who pay a lot in taxes can lower their tax liability by contributing to a traditional IRA, provided they can deduct the full amount.
Who Should Pass:
- People Who Don’t Want to Take Minimum Withdrawals: This isn’t the best account for people who want to leave their money invested longer. Traditional IRAs require that you begin by taking minimum withdrawals at 73 or pay a penalty.
- People Who Want to Contribute Well Into Old Age: Because of the way traditional IRAs are set up, you can no longer contribute once you reach age 73. A Roth IRA, on the other hand, lets you contribute for a lifetime, provided you meet income requirements.
- Anyone Who Wants to Diversify Their Tax Liability in Retirement: Traditional IRAs are like other tax-deferred accounts in that your money grows tax-free, but you’ll pay taxes when you begin taking distributions. If you want to diversify your tax liability by paying taxes on some of your retirement savings now, consider a Roth IRA.
Roth IRAs
With a Roth IRA, contribution limits are $7,000 for 2024 or $8,000 if you’re age 50 and up.
The big difference is the contributions you make are with after-tax dollars. Once you contribute, your money grows tax-free until you are ready to begin making withdrawals in retirement.
This can be good or bad – it really depends on your goals and outlook. By paying taxes on your contributions upfront, you can save some serious cash on your tax bill later in life. Then again, who knows what your tax rate will be when you retire years or even decades from now.
But, there are other benefits that come with a Roth IRA, including the fact that there are no forced withdrawals at any age, and you can contribute as long as you earn an income – even if you’re over age 73.
The biggest downside to using a Roth IRA is that there are strict income guidelines that govern who can contribute.
And if you exceed those guidelines, no contribution is permitted at all.
For married couples filing jointly, your ability to contribute to a Roth IRA starts phasing out with a MAGI (Modified Adjusted Gross Income) of $230,000 and phases out completely at $240,000. For single filers, the phase-out range starts at $146,000 and ends at $161,000.
Who Should Consider a Roth IRA:
- Anyone Who Wants to Diversify Their Tax Liability: Since you pay taxes on your contributions now, you won’t have to pay taxes on your distributions later. All the while, your money grows tax-free. If you’re worried about how your tax bill might look in the future, contributing to a Roth IRA can be a smart way to diversify.
- Someone Who Wants Access to Their Cash: Few people know this, but you can actually take your contributions (not your earnings) out of your Roth IRA at any time without paying a penalty. If you think you might need to access your funds before retirement, a Roth IRA offers some flexibility in that respect.
- People Who Want Flexibility When It Comes to Contributions and Withdrawals: Since people who qualify to use a Roth IRA can continue contributing past age 70 ½ and don’t have to begin taking distributions at any age, this is one of the most flexible retirement accounts out there.
Who Should Pass:
- Someone Who Wants to Leverage Retirement Savings to Save On Taxes: Since Roth IRAs are funded with after-tax dollars, you can’t deduct your Roth IRA contributions on your taxes no matter how much or how little you earn. If you want to save money on taxes, tax-deferred retirement accounts might be a better bet.
- High Earners Who Make Too Much Money: Since phase-outs for who can contribute to a Roth IRA begin at $146,000 for single filers and $230,000 for married couples filing jointly, not everyone can contribute to a Roth IRA in the first place.
| CATEGORY | TRADITIONAL IRA | ROTH IRA |
| Contribution Limits (2024) | $7,000 for Less Than 50 Years, $8,000 for 50 Years and Beyond | $7,000 for Less Than 50 Years, $8,000 for 50 Years and Beyond |
| Tax Treatment | Tax-Deductible Contributions Taxed on Withdrawals | After-Tax Contributions Tax-Free Withdrawals |
| Contribution Limits if Both IRAs Used | Total of $7,000/$8,000 | Total of $7,000/$8,000 |
| Tax Deduction Phase-Out | Married: $123,000 – $143,000 Single: $77,000 – $87,000 | N/A |
| Income Limits for Deduction | Married With Employer Plan: $123,000 – $143,000 Single With Plan: $77,000 – $87,000 | Single: $146,000 – $161,000 Married: $230,000 – $240,000 |
| Special Rules for Spouse With Employer Plan | Married, One Spouse With Plan: $230,000 – $240,000 | Same as Regular Roth Limits |
| Benefits | Potential Tax Deductions No Mandatory Withdrawals | Tax-Free Growth and Withdrawal Flexibility in Contributions & Withdrawals |
| Drawbacks | Mandatory Withdrawals at 73 No Contribution after 70 1/2 | Income Limitations No Deduction for Contributions |
| Ideal For | High Earners Wanting More Options Mid-Range Earners Wanting Tax Reduction | Tax Diversification Seekers Flexibility & Access Seekers |
| Not Suitable For | Avoiding Minimum Withdrawals Contributing After 70 1/2 | Seeking Immediate Tax Savings High Earners Beyond Limits |
Where to Open a Traditional or Roth IRA
If you want to boost your retirement savings and plan to do so by adding an IRA to your portfolio, there are plenty of online brokerage firms that can help. I’ve reviewed quite a bit of them in-depth, and I have a few favorites as a result.
Here are my top choices when it comes to opening a traditional or Roth IRA:
M1 Finance
M1 Finance offers another great option for both beginning and experienced investors.
For starters, there are no commissions on stocks or exchange-traded funds, plus you have access to M1 Finance’s investing tools and data. The account minimum for IRA is also $500 with an M1 Finance account, making this option smart for beginners who just want to dip their toes in at first.
Read here to find out more about the M1 Finance review.
Betterment
As a true robo-advisor, Betterment offers a slightly different approach to IRAs. With Betterment, your IRA will be invested across two baskets of investments: a bond ETF basket and a stock ETF basket.
Since Betterment will help make your investment decisions for you, you won’t have to worry over which individual investments to use. Plus, Betterment comes with no account minimums and relatively low fees, depending on your account balance.
Make sure to check out my review of Betterment.
In addition to these options, we have covered a wide range of other firms you should consider for your retirement funds over the years. As you continue your research, make sure to check out these posts as well:
- Best Investments for a Roth IRA
- Best Online Stock Broker Sign-Up Bonuses
- Best Online Brokerage Accounts for Beginners
Will You Have a 401(k) and an IRA?
If the thought of saving for retirement has you feeling overwhelmed, remember that it’s perfectly okay to start small.
The good news is there are all kinds of retirement accounts to choose from that might be perfect for your situation.
The list includes work-sponsored retirement accounts like 401(k) or 403(b) to traditional IRAs and Roth IRAs – plus every other type of retirement account you can think of.
If you want enough money to have an enjoyable retirement, the time to start saving is now. Don’t delay, and don’t make excuses. Time goes by much faster than we think, and retirement will be here before you know it.
