6 best retirement plans in 2024

Retirement plans are some of the greatest ways to build wealth and achieve retirement saving goals much faster than other wealth-building strategies. The money you contribute to your retirement accounts gives you direct or indirect tax advantages which are essential to growing your net worth and reaching financial independence. For example, if you have a pre-tax 401(k) with your employer, your contributions will be tax-deductible. Additionally, you will grow your account on a tax-deferred basis and pay tax only when taking distributions during retirement.

In addition, your employer will give you free money by matching your contributions up to a certain percentage. For example, if you have a 401(k) plan and your employer match is 6%, you will get $3,000 free money from your employer on a $50,000 salary.

While a 401(K) plan is an important retirement plan to help you save for retirement, it is not the only retirement plan with great benefits. There are way more retirement plans with great benefits that you should consider in 2024. For example, if you have a Roth IRA, you will not get direct tax benefits, but you will grow your account tax-free, and withdraw your money tax-free. Additionally, Roth IRAs do not require RMDs and you will give the account to your heirs tax-free.

Table of Contents show

What is a retirement plan?

A retirement plan is a plan that allows you to save a portion of your income toward your retirement. For the system to work, the government gives tax incentives to people who participate in these plans.

Retirement plans come in many shapes and sizes. Some of these plans let you stash away a portion of your wages before tax which allows you to defer tax until you are taking distributions during retirement.

Other retirement accounts such as a Roth IRA and Roth 401(k) let you make contributions with after-tax money. The benefit of these types of retirement accounts is that you grow your accounts tax-free and pay no income tax on your distributions. Every dollar you own in these retirement accounts will be yours to keep.

Important: Early withdrawals from your retirement account will trigger a 10% penalty for most retirement accounts, according to the IRS. On top of this penalty, you will pay tax on your distributions depending on the retirement plan you have and its terms. The penalty together with applicable tax can easily take away 35% to 45% of your distribution. That is how people make premature withdrawals of like $40,000 and end up taking home only $25,000. And then say, “The government took my money!”

6 Important Retirement Plans in 2024

If you are ready to save for retirement, the following are the most important retirement plans you should not ignore in 2024. Whether you are employed, self-employed, or a small business owner, these retirement plans are the best to choose from if you want to maximize your retirement savings and grow your net worth.

Without further ado, let’s get started.

1. 401(k) and 403(b)

One of the most popular types of retirement plans is a 401(k) plan. This retirement plan allows you to make contributions with your pretax paycheck toward retirement through payroll deductions. On top of that, your employer can match your contributions by a certain percentage which becomes free money. With a 401(k) plan, you grow your savings on a tax-deferred basis and pay income tax on your withdrawals during retirement.

Just like your regular 401(k), the 403(b) plan offers the same benefits. The only difference between a 401(k) and a 403(b) is that 401(k)s are offered by private businesses that operate for profit while 401(b)s are offered by NGOs or through government employment. For example, if you work for a hospital, a school, or any other government office, you will get a 403(b) plan.

What is a 401(k) retirement plan?

A 401(k) retirement plan is an employer-sponsored retirement plan that allows employees to contribute some of their before-tax wages toward retirement, according to the IRS. Since the money you contribute to your 401 (K) comes from your before-tax wages, you grow your account without paying tax until you are taking distributions during retirement. The same strategy also applies to your 403(b) plan.

Pros of 401(k) and 403(b):

You get free money when your employer matches your contributions
Contribution limits to 401(k)s and 403(b)s are higher than other retirement accounts. For 2024, the 401(k) contribution limits are $23,000 or $30,500 if you are 50 or older.
The money you contribute is taken off before tax which helps you lower your taxable income
You grow your account without paying tax until you are taking distributions during retirement

Cons of 401(k)/403(b):

Some employers have a vesting period where you must wait until you are fully vested before the employer’s contribution becomes 100% yours. Leaving the company before you are fully vested can result in losing some or all of your employer’s match.
You will have a limited choice of investments
401(k) plan is not a way to evade tax. You will still pay an income tax during retirement when taking distributions
You will pay a hefty penalty if you take an early withdrawal

401(k) contribution limits in 2024

Like other retirement plans, there is a limit to how much you can contribute to your 401(k) retirement account. According to the Internal Revenue Service (IRS), you can contribute up to $23,000 in 2024 into your 401(k) or 403(b). Those who are 50 or older can make an additional $7,500 catch-up contribution. With this catch-up amount, people who are at least 50 years old can contribute up to $30,500 to their 401(K) retirement plans.

When can you withdraw money from 401(k) without a penalty?

One thing you must understand is that the money in your 401(k) plan cannot be touched until you have reached the accepted retirement age by the IRS. If you withdraw the money before retirement, you will pay a penalty. To withdraw money from your 401(k) without paying a penalty, you must be 59 ½. Some people find it difficult to wait this long, but it is worth it.

2. Solo 401(k) a.ka. Solo-k or One-participant 401(k)

The Solo 401(k) is a retirement plan that is widely used around the country by many small business owners. If you are an employee and never owned a business, however, you may not know about this plan. This is because the Solo 401(k) retirement plan is used only for business owners with no other employees.

What is a Solo 401(k)?

A Solo 401(k) a.k.a one-participant 401(k) is like a pre-tax 401(k) except that it covers a business owner with no other employees. If you are self-employed (business owner), then this plan is for you. The benefit of this plan is that you can increase your contribution and save money in the account as an employer and employee at the same time.

This account has other names too. According to the IRS, the Solo 401(K) is also known as a Solo-k or a Uni-K. The Solo 401(k) rules and contribution limits are the same as pre-tax(401). The only difference is that pre-tax 401(k)s are for large businesses with many employees while the Solo 401(k)s are for self-employed individuals without other employees. Additionally, the employer contribution to a One-participant 401(k) cannot be more than 25% of your adjusted gross income.

For example, if you made $100,000 with your LLC business and you are 35 years old, you can contribute $23,000 to your Solo 401(k). Since you are self-employed, you can make an extra contribution of up to $25,000(25% of your gross income) as a match to the account. With this plan, your age, and income, the maximum contribution you can make to this specific plan is $48,000.

Pros of one-participant 401(k)

The Solo 401(k) gives you a chance to save money for retirement when you are self-employed.
You have a higher chance of contributing more money to the account compared to other retirement packages
The plan has similar rules to a traditional 401(k) which makes it easy to set up and apply.

Cons of a one-participant 401(k)

Just like a pre-tax 401(k), your money can be invested in investments inside your account
You can grow your account on a tax-deferred basis and pay income tax during retirement

How much can you contribute to a Solo-401(k)?

The contribution limits to a Solo 401(k) for 2024 are $23,500 and $30,500 for individuals over 50 years old. People who are over 50 get that extra $7,500 on top of regular contributions to catch up. The total contribution limits to the plan without catch-up contributions cannot exceed $69,000.

3. Roth IRA

Another important retirement plan you should consider this year is a Roth IRA. The IRA stands for an individual retirement account. The Roth IRA is one of the best retirement plans as it comes with unique tax benefits that are different from pre-tax retirement plans.

What is a Roth IRA?

A Roth IRA is one of the most popular individual retirement accounts (IRAs) with tax advantages. Unlike traditional IRAs with upfront tax benefits, contributions to your Roth IRA come from your after-tax wages. What makes a Roth IRA one of the best retirement plans is that you grow your account tax-free and your withdrawals are also tax-free. Additionally, Roth IRAs do not require RMDs and you will pass on the account to your heirs tax-free.

Pros of Roth IRA

Offer more flexibility
You grow your account tax-free
Your distributions are tax-free
The account does not require RMDs
You pass the account to your descendants tax-free

Cons of Roth IRA

Small contribution limits up to $7,000 in 2024
Your contributions cannot exceed your income. This means if you made only $5,000, that is the max you can contribute.
Your contributions come from after-tax wages

When can you take money out of your Roth IRA without penalty?

To avoid a penalty on your Roth IRA withdrawals, you must be at least 59 ½ and have owned the account for at least 5 years. The exception to this rule applies when you are taking money due to disability, first home buying, or for college expenses.

Roth IRA early withdrawal penalty

Being a tax-advantaged retirement plan means that you could pay a penalty when you withdraw money before retirement. The penalty for withdrawing money from your Roth IRA before turning 59 ½ is 10% of the amount withdrawn. On top of this penalty, you could end up paying tax on the amount you withdrew.

Contribution limits to Roth IRA in 2024

Like other retirement plans, there is a limit to how much you can contribute to your Roth IRA. According to the IRS, the maximum contribution to your Roth IRA is $7,000 in 2024 and $6,500 in 2023. However, those who are 50 and older can contribute an extra $1,000 to the account.

4. Traditional IRA

A traditional IRA is a popular and tax-advantaged retirement account that helps you save money for your retirement. With a traditional IRA, your contributions may be partially or fully deductible, according to the Internal Revenue Service(IRS). Factors that will affect your deductions include your filing status and adjusted gross income.

Any deductible contributions to your traditional IRA will grow on a tax-deferred basis. However, application tax will apply when you are taking distributions during retirement.

Just like a Roth IRA, early withdrawals from a traditional IRA will trigger a 10% penalty plus applicable tax.

Traditional IRA contribution limits in 2024

There is a limit to how much you can contribute to your IRA. IRS denoted that the maximum contribution to a traditional IRA for 2024 is $7,000. However, those who are 50 and older can contribute an additional $1,000 for a maximum contribution of $8,000.

What is the difference between a Roth IRA and a Traditional IRA?

There is a similarity between a traditional IRA and a Roth IRA. Both retirement plans have tax advantages but there is a difference in when those tax advantages are applied.

For the Roth IRA, your contributions come from after-tax wages. However, you grow your account tax-free and you do not pay tax when you are taking withdrawals during retirement. Every dollar you earn on your Roth IRA is yours to keep.

With a traditional IRA, on the other hand, your contributions might be tax-deductible based on your income and filing status. You will then grow the account on a tax-deferred basis and pay applicable tax during retirement.

Who should use a traditional IRA?

A traditional IRA operates like a 401(k) except that it is not provided by an employer. The account gives you a chance to put your money away tax-free and pay tax only when you are taking the money out during your retirement.

For these two reasons, the traditional IRA is good for people who want to minimize their taxable income while expecting a lower retirement income. This is because if you were expecting a higher retirement income, a Roth IRA would be the best choice to help you minimize your retirement tax liabilities.

Pros of traditional IRA

Contributions might be tax-deductible
Anyone can open a traditional IRA
You get a wide range of investment options such as mutual funds, index funds, bonds, and ETFs.
Your earnings are not taxed until you are taking distributions during retirement

Cons of traditional IRA

You still pay tax when you withdraw money from your account during retirement
The contribution limit of $7,000 in 2024 is still low compared to contribution limits of $23,000 for the 401(k) plan
You will pay a 10% penalty and applicable tax for early withdrawals

5. Simple 401(k) and Simple IRA

A simple 401(k) is one of those retirement plans you probably never heard of. But, it is widely used and it is similar to a traditional 401(k) with some changes to the plan.

According to the IRS, a SIMPLE 401(k) retirement plan and SIMPLE IRA plan are both offered for small businesses with less than 100 employees. Being small means that small businesses cannot offer all the benefits that come with regular 401(k) retirement plans. That is why you have a SIMPLE 401(k) and SIMPLE IRA. SIMPLE plans are cost-effective retirement plans offered to small businesses as an alternative to traditional 401(k) plans.

To qualify for a SIMPLE 401(k) and SIMPLE (IRA), a business must:

Have less than 100 employees
cannot have other retirement plans, and
Must file a Form 5500 annually.

Before contributing to the plan, each employee must meet the following income requirements.

Must have made at least $5,000 for each of the previous 2 years
An employee must be expecting to get paid at least $5,000 for the current year

An employer contribution to SIMPLE IRA

The SIMPLE plans come with only two employer match contribution options, according to the IRS. These options are a matching contribution of up to 3% of each employee’s pay or a non-elective contribution of 2% for each payment of an eligible employee.

How much can an employee contribute to the SIMPLE IRA?

Contribution limits to SIMPLE IRA in 2024 is $16,000. Those who are 50 and older can make an extra $3,500 catch-up contribution.

6. SEP IRA

Unless you are a small business or self-employed, you will not know about the SEP retirement plan. The SEP-IRA Simplified Employee Pension operates much like an IRA. The big difference between the two plans is about the money that can be contributed to the plan.

The maximum contribution to SERP IRA an employer can contribute to the plan cannot exceed 25% of each employee’s income. Additionally, the maximum contribution to your SERP IRA is $69,000 for 2024, according to Nerdwallet.

Additionally, employees are fully vested right away which gives them a chance to qualify for all employer’s contributions without waiting. Furthermore, the SEP-IRA does not offer catch-up benefits for people who are over 50 years old or older.