The Difference Between Retirement Accounts

Guest Blog Post by PJ Wallin

Saving money for when you retire is pretty much essential for a comfortable lifestyle during your Golden Years.

It's no longer wise to rely 100% on Social Security (was it ever?), so the sooner you get to know the different types of retirement accounts, the better. Here's your mini-guide to the different types of retirement plans.


Employer-Sponsored Retirement Plans

I thought I'd include these "dinosaurs" because although they are rare these days, they do still exist. There are two types:

1.Defined Benefit Plans. These are the real dinosaurs- where you work for a company, then receive a pre-determined amount of pension money each month. That amount is based on your salary history and how long you worked at the company. That defined benefit was pretty much guaranteed- in other words, wonderfully reliable and secure.

2.Defined Contribution Plan. Now, if there's an employer-sponsored benefit plan, it's most likely this type. The contributions are defined: the worker puts in a pre-determined amount from each paycheck. What he or she gets out of that during retirement is anybody's guess, and totally up to the market. In other words, this type of plan offers no guaranteed returns.


Roth IRA

If you're not lucky enough to have an employer-sponsored retirement plan (very few people are these days), then you'll probably want to set up some type of individual retirement account, or IRA.

The Roth IRA is an investment account where you contribute after-tax money (up to a certain limit) and your withdrawals during retirement are tax-free. The limits are at present $5,500 per individual per year. If you are over 50 you may contribute $1000 more, in what's called "catch-up" contributions.


Traditional IRA

The Traditional IRA is the mirror image of the Roth IRA. Your contributions are tax deductible (pre-tax contributions, in other words), but your withdrawals will be taxed. The philosophy here is that you will save money on your tax bill because during retirement you will presumably be in a lower tax bracket so your tax rate will be lower.

Each person is different, so think carefully about your own situation before choosing between an Roth and a Traditional IRA. A financial advisor can help you with that discussion if you need some guidance or more information.

Limits: $5,500 for 2016

Catch-up contribution limit: $1000



The 401(k) is the next-best thing if your company doesn't offer a pension program. The reason for this is because of "matching contributions". First, the 401(k) is a good idea because it's a good way to save for retirement. Secondly, the matching contributions are essentially "free money" from your employer.

You set up an automatic contribution schedule with your employer (usually through Human Resources). That keeps you saving regularly. Another benefit is that those contributions aren't taxed until you withdraw the money during retirement.

Sign up for matching contributions for a third benefit, and you're really saving putting a multiplier effect on your savings efforts. Many employers will match your contributions up to a limit, and usually around 50% of what you put in.

Limits: $18,000 in 2016

Catch-up limits: $6,000 for 50 and over



The Thrift Savings Plan has traditionally been for federal workers only, but some politicians want to open the system up to more workers. It's like any other investment retirement plan, only the management fees are much lower. They're lower because of the limited choices in how to invest your money.



A Simplified Employee Pension Plan is a Traditional IRA (see above) that's set up by an employer for an employee. The employer may make the contributions and so may the employee.



See anything you like? Get to know these retirement vehicles, because chances are someday one of them will be among your best friends.



PJ Wallin is the founder of Atlas Financial, a fee-only financial planning, investment management, and tax services firm located in Richmond, Virginia. Atlas uses an all-inclusive approach provides a clear overview of your financial potential and gives you the comprehensive support necessary for peak success.

PJ and I became friends after meeting at an industry conference, and I asked him to write some thoughts as a guest topic for this site.