The right retirement savings account makes all the difference when it comes to enjoying a comfortable retirement. Of course, the right investments for these accounts depend on your age and risk tolerance. Younger workers may want to take a more aggressive investing approach. When market downturns occur, they have enough time on their side to wait for market rises. Those approaching retirement don’t have the luxury of time and need a more conservative investment strategy.

What is a Retirement Savings Account?

A retirement savings account serves as a vehicle for putting money away for retirement with considerable tax advantages. As fewer American receive pensions, retirement savings accounts play a vital role in providing income for those no longer working.

Various types of retirement savings accounts exist. We’ll review some of the most common.

Traditional IRAs

A traditional IRA allows you to contribute pre-tax dollars to this retirement savings account. The investments are tax-deferred until withdrawal at retirement. At that stage, most people are in a lower tax bracket. You must take Required Minimum Distributions (RMDs) by age 72.

Depending on your income and filing status, contributions to a traditional IRA may prove tax-deductible. If you did not participate in an employer-sponsored retirement plan at work, your contributions are fully deductible. If you, or your spouse, participates in a work retirement plan, you can fully deduct the maximum contribution limit only if your Adjusted Gross Income is $68,000 for a single filer or $109,000 for those married and filing jointly. Partial deductions are allowed for single filers with an AGI of up to $78,000 and married filing jointly of up to $129,000. Beyond those amounts, traditional IRAs are not deductible.

However, to get the most out of retirement savings, it usually makes sense to contribute to an IRA even if not tax-deductible. It is still a tax-deferred method of putting away money for your golden years.

Keep reading for more info on retirement savings accounts.

Roth IRAs

Roth IRAs are funded with post-tax dollars. That means you cannot deduct Roth IRA contributions, but there are other benefits. When funds are withdrawn in retirement, you pay no tax

Unlike a traditional IRA, there are no RMDs with a Roth IRA. You need never withdraw money from these accounts if you don’t have to do so.

Not everyone is eligible to contribute to a Roth IRA. For 2022, those married filing jointly can contribute the full amount if their AGI is $204,000 or less. They can make partial contributions up to an AGI of $214,000. A single filer or those filing as head of household may contribute up to the limit if their AGI is $129,000 or less. Partial contributions are permitted for those making up to $144,000. Above that amount, contributions are not allowed.

SEP-IRAs

If you are self-employed, whether full-time or part-time, a Simplified Employee Pension Plan (SEP) IRA can help you save for retirement. Any size business, including sole proprietorships, can establish a SEP.

A SEP-IRA functions in the same way as a traditional IRA, except for contribution limits. Monies contributed to the SEP-IRA grows tax-free until withdrawal.

401(k)

A 401(k) is an employer-sponsored retirement plan. Employees fund their 401k via automatic payroll deductions taken from their pretax income. This means workers can reduce their taxable income while the funds put in the 401k are tax-deferred until the person starts making withdrawals.

One of the great advantages of the 401(k) is that employers may match contributions up to a certain percentage of employee salary. In other words, it’s free money!

Examples of other retirement savings accounts include:

• 403(b) plans: offered by public schools and some 501(c)(3) nonprofit organizations. Also known as a tax-sheltered annuity plan.
• 457(b) plans: offered by state or local government or tax-exempt organizations.
• 401(a) plans: offered to employees of the U.S. government, state or political subdivisions, or Indian tribal governments.

Retirement Savings Account Eligibility

What can you place in a retirement savings account? Investment eligibility includes stocks, bonds, mutual funds, ETFs, annuities, money market accounts, certificates of deposit, and real estate. While you can place your retirement savings account in an actual savings account, the current low-interest rate environment does not make this a good choice for most people.

Keep in mind that IRA trustees may not allow the real estate investment option. That is due to administrative burdens, not IRS prohibitions.

There are items in which the IRS does not permit IRA investments. These include:

• Antiques
• Art
• Coins
• Collectibles
• Gems
• Life insurance
• Metals, with exceptions for certain bullion types
• Rugs
• Stamps

Rare wines and other alcoholic beverages are also ineligible for inclusion in retirement savings accounts.

As for withdrawal eligibility, a 10 percent penalty is levied if withdrawals are made before the age of 59.5. There are exceptions to the early withdrawal penalty. These include:

• First-time home purchase
• Qualified education expenses
• Expenses related to birth or adoption
• Disability
• Unreimbursed medical expenses if unemployed.

Retirement Savings Account Contributions

For 2022, the maximum traditional and Roth IRA contribution limit is $6,000 for those under age 50 and $7,000 for those 50 and up. You must have sufficient earnings to meet the maximum contribution limit. Otherwise, you cannot contribute the full amount.

You can contribute to both a traditional and Roth IRA, but cannot exceed the contribution limits. For instance, you could contribute $3,000 to both types of accounts. If eligible, you can deduct the traditional IRA contribution.

For a SEP IRA, the  IRS permits you to put away as much as 25 percent of your annual net income from self-employment. For 2022, self-employed individuals may put away as much as $61,000, based on a net income limit of $305,000.

In 2022, employees can make annual salary deferrals of up to $20,500 to their 401(k). Those 50 or older may make an additional $6,500 salary deferral.

Retirement Savings Account Considerations

Whether you are contributing to a Roth IRA or a traditional or SEP IRA, you can only contribute earnings from a job. Money from gifts or investments is ineligible. Many people work past the traditional retirement age. The IRS requires that individuals with traditional IRAs and employer-sponsored retirement plans such as 401(k)s take mandatory withdrawals by the age of 72. However, if you are still working at that age and want to keep contributing to a retirement savings account, you can continue to do so.