What’s the Best Way to Contribute to Retirement?

The best way to contribute to your retirement is to simply contribute to it. What a misleading title, right? But the point is you will read a lot of stuff on the internet and hear opinions from various people’s perspectives on what retirement plan is the best and why their opinion is the right one, but when it really comes down to it retirement looks different for everyone.

Employer-Sponsored Retirement Plans

Employer-sponsored retirement plans are what most people think of when they think of retirement plans. There can be a defined benefit or defined contribution plan. Defined benefit plans give you a set amount of money each month upon retirement while a defined contribution plan is based on what you contribute to it (plus whatever your employer may or may not match). Employer-sponsored plans differ greatly between employers, so for more information, it’s best to check with your human resources department.

If you follow me on Twitter, you may have saw my tweet regarding my husband losing his 401(k) match (along with bonuses being cut and no raises). This, of course, is due to the impacts COVID is having on business. You may also know that I left my job last year to become a stay-at-home mom. So, naturally, some people may be wondering if I will go back to work or if this will have a dramatic impact on our finances. The answer to both of those questions is no.

We do not have any current plans for retiring early, so while it does suck that my husband’s company is no longer matching 50% of 5% of his retirement contribution, it does not really change things for us. How?

Individual Retirement Accounts

Well, we choose not to solely rely on employer-sponsored retirement plans for our future. My husband contributes the maximum amount to his 401(k) and we both contribute the maximum to our IRAs each year.

If you’re not too familiar with retirement plans, there is a thing called an IRA, or individual retirement account. An IRA, from an individual perspective not small business perspective, is a tax-advantaged self-directed and self-funded retirement plan. This means individuals can contribute to their retirement plan up to the maximum contribution limit set by the IRS and invest that money in various ways (stocks, bonds, ETFs, mutual funds, etc.). Individuals can choose between a Roth IRA and a Traditional IRA, each of which offers their own tax advantages.

Taxable Brokerage Accounts

In addition to our employer-sponsored retirement plans and IRAs, my husband and I also have taxable brokerage accounts that we contribute to, as well. While we have several plans for what we are doing with that money (such as college funds for our child and any future children), one plan would be to use some of these funds in retirement if we need to. Taxable brokerage accounts offer no tax advantages, however, so many people do not view them as a place to put money for retirement, but depending on what retirement looks like for you, it may make sense.

If you are planning on retiring early, it may make more sense to build a bulk of your retirement funds in a taxable brokerage account. Why? If you access funds from an employer-sponsored plan or an IRA before the age of 59 ½, you will be hit with a 10% early withdrawal penalty.

Retirement Looks Different for Everyone

There are several options for retirement plans, as you can see. You may have an employer-sponsored plan, IRA or traditional brokerage. Furthermore, within these plans, you may have to choose between a traditional retirement account or a Roth. Some people may want to contribute everything they can to retirement via different types of plans/accounts, while others favor one retirement plan over the others. Some people can afford to contribute the maximum allowed, while others choose to contribute just up to their employer match. Some people choose to retire early, while others plan to continue working until they physically cannot anymore. The point is, no matter when you plan to retire or how you plan to do, just make sure you are contributing to your retirement, preferably as much as you can comfortably afford. You will be thankful you did.