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It’s never too early to think about retirement income planning. The first step is deciding to start saving for retirement. There are a lot of different retirement savings plans and account options, and your employment status will help determine what's available to you. Some retirement accounts – called "employer-sponsored plans" are only available if you're employed by a business, tax-exempt or non-profit entity, or the government. Others – known as "Individual Retirement Accounts" – aren't dependent on your job status. Both categories of plans have significant tax advantages compared to a regular savings or brokerage account. Here's a brief overview of the most popular types of plans.
Employer-sponsored plans
An employer-sponsored retirement savings plan is one of the most valuable benefits you can have as an employee. While participation isn't always mandatory, most financial professionals would advise you to do so if at all possible. Some plans also offer an employer match, where the company contributes a certain percentage of your salary to your retirement account. Employer-sponsored plans usually have higher contribution limits than IRAs (see below), which can help you to accumulate more money over the same period. But it's important to understand that different kinds of employers can offer different kinds of plans, and each has its own rules for how contributions are made and when they are taxed. Common employer-sponsored plans include:
Plan | Type of employer | How contributions are made | How funds grow | Other features | How funds are invested |
401(k) | Available to non-governmental employers including tax-exempt companies | Employee selects pre-tax contributions for immediate tax savings or after-tax contributions | Investment earnings grow tax-deferred until retirement | Many employers match your contribution; retirement withdrawals from pre-tax contributions and earnings on after-tax contributions are subject to ordinary income tax | Employee chooses from a variety of investments, including CDs, bonds, stocks, and mutual funds but may vary by plan |
403(b) | Tax-exempt organizations | Employee selects pre-tax contributions for immediate tax savings or after-tax contributions | Investment earnings grow tax-deferred until retirement | Many employers match your contribution; retirement withdrawals from pre-tax contributions and earnings on after-tax contributions are subject to ordinary income tax | Employee choices usually include annuities and mutual funds, but may vary by plan |
457(b) | State and local governments and some non-profits | Pre-tax contributions for immediate tax savings | Investment earnings grow tax-deferred until retirement | Retirement withdrawals are subject to tax; no early-withdrawal penalties if an employee separates before age 59 ½; | Employee chooses from a variety of investments, including CDs, bonds, stocks, mutual funds, annuities, but may vary by plan |
Thrift savings plans (TSP) | Federal employees and some uniformed service members | Employee selects pre-tax contributions to a traditional TSP and/or after-tax contributions to a Roth TSP | Pre-tax contributions get immediate tax savings; after-tax contributions get tax-free withdrawals in retirement | Employee investment choices typically include index funds and other options |
What about traditional pension plans?
Also known as a "defined benefit plan," these are employer-funded plans that guarantee a specific monthly income during retirement, typically based on years of service and salary history. They have become much less common in recent years as many employers have transitioned to employee-funded "defined contribution plan" alternatives, such as 401(k) plans.
Individual Retirement Accounts (IRAs)
An Individual Retirement Account - or IRA – is a tax-advantaged retirement savings account funded and managed by an individual – you – without any employer involvement. They are typically used by self-employed people and by those wishing to supplement their employer-sponsored plans.
There are two main types of IRAs, and the primary difference has to do with when you pay income taxes. Contributions made to traditional IRAs are typically made with pre-tax dollars – which reduces taxable income for the year – and investment growth is tax-deferred, but taxes are paid when you withdraw funds in retirement. On the other hand, a Roth IRA is funded with after-tax dollars (so you don't get a tax deduction when you contribute), but investment growth is tax-deferred, and qualified withdrawals are tax-free during retirement. Other features, tax benefits, and types of IRAs include:
Plan | Best suited for | How contributions are made | How funds grow | Other features | How funds are invested |
Traditional IRA | Those who will be in a lower tax bracket after retiring | Pre-tax contributions for immediate tax savings | Investment earnings grow tax-deferred until retirement | Retirement withdrawals are subject to tax; penalty-free early withdrawals are allowed for certain purposes | Investment choices include CDs, bonds, stocks, mutual funds, and more |
Roth IRA | Those who will be in a higher tax bracket after retiring | After-tax contributions but qualified withdrawals are not taxed | Investment earnings grow tax-deferred until retirement | Qualified retirement withdrawals are not taxed; early withdrawals that are not qualified withdrawals may be subject to a penalty1 | Investment choices include CDs, bonds, stocks, mutual funds, and more |
Spousal IRA | A non-working spouse or spouse with limited income | Can be pre-tax (Traditional IRA) or after-tax (Roth IRA); working spouse can contribute for non-working spouse | Investment earnings grow tax-deferred until retirement | Pre-tax (Traditional) contributions get immediate tax savings; after-tax (Roth) contributions get tax-free qualified withdrawals in retirement | Investments include CDs, bonds, stocks, mutual funds, and more |
Rollover IRA | Those who want to transfer funds from an employer-sponsored plan | For those changing jobs or retiring | Investment earnings grow tax-deferred until retirement | Can be used to consolidate retirement savings from different employers | Investment choices include CDs, bonds, stocks, mutual funds, and more |
SEP IRA (Simplified Employee Pension) | Self-employed individuals or small business owners | Have higher contribution limits than Traditional IRAs | Investment earnings grow tax-deferred until retirement | Business owners can contribute on behalf of employees | Investment choices include CDs, bonds, stocks, mutual funds, and more |
Simple IRA | Businesses with under 100 employees | Pre-tax contributions for immediate tax savings | Investment earnings grow tax-deferred until retirement | Employers required to make matching or elective contributions | Investment choices include CDs, bonds, stocks, mutual funds, and more |
Other ways to save for retirement
Employer-sponsored retirement plans and IRAs are among today’s most popular retirement savings vehicles, but they are not the only options. Other popular choices include annuities and cash-value life insurance policies.
Annuities
These are financial products that convert a sum of money into a steady stream of income during retirement. While annuities can provide lifetime income that helps ensure you don't outlive your savings, they can also be complex investments.
Investments grow tax-deferred, allowing money to grow faster than in taxable accounts.
Options include immediate annuities that begin paying out immediately after purchase or deferred annuities that allow the investment to grow over time before starting income payments.
Annuities can be structured as fixed, where investment growth is based on a set rate of interest, or variable, where investment growth (and later income payments) fluctuates based on the performance of underlying market investments.
Some annuities include features like inflation protection, which adjusts the payments to maintain purchasing power.
Cash-value life insurance policies
While the primary purpose of a life insurance policy is to provide a death benefit payout to help protect beneficiaries’ financial well-being, whole life insurance and universal life insurance policies can also be used as a retirement savings vehicle. In addition to protecting your loved ones in the event of an untimely death, these policies provide a tax-advantaged way to accumulate funds that can be used before or after retirement. As children become self-sufficient adults, many people use their cash-value life insurance to supplement other retirement accounts. (Please note that term life insurance does not accumulate cash value and has no benefit in terms of retirement savings.)
A portion of every premium payment goes into a cash account which grows over time and can be accessed while the policyholder is still living.
The cash value component of the policy grows tax-deferred, so your money can grow faster.
Policyholders can borrow against the accumulated cash value without triggering taxable events, providing a source of tax-free income in retirement.
Some policies may allow you to convert the cash value into an annuity, providing a steady stream of income during retirement.
Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
Guardian can help
There are many ways to save for retirement and help safeguard your future. If you need help with what to do, consider getting guidance from a financial professional. If you don't currently work with one, Guardian can help. A Guardian Financial Professional will listen to your needs, help define your goals, and work with you to better understand the retirement planning process and make the right decisions. Here's how to find someone near you:
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This material is intended for general public use. By providing this content, The Guardian Life Insurance Company of America, The Guardian Insurance & Annuity Company, Inc. and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation.
The information provided herein is not written or intended as investment, tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel.
1 https://www.irs.gov/publications/p590b#en_US_2022_publink100089548