Retirement Vehicles

VROOOOOOOOOMMMM!!!!! The engine is purring, hop in!

This post is intended to outline the different retirement plans that may be available to you. My hope is that you’ll have a better understanding of each type of vehicle, and how they can benefit you the most. Think of this as an overview of some of the more common ones.

We’ll take a deeper dive into some of them in the future, but it’s important to note that your specific retirement plan might have different rules or nuances that are not covered in this post. It’s absolutely worth taking the time to read up on your specific plan to ensure you are following the regulations set, thus maximizing the benefits these vehicles have to offer!

Is that a green light? 🚦 Let’s go!

Defined Benefit Plans

Commonly referred to as a pension plan, it provides a fixed benefit for participating employees at the time of their retirement. Essentially the employer will put contributions towards a single retirement pool which are invested and begin paying employees at the start of retirement.

The payout to each person is based on a formula that may include factors such as salary, age, and tenure with the company or organization. The nuances of each pension plan differ greatly, so it’s more important for these participants to understand their specific benefits. Pensions are becoming increasingly rare, but they still exist.

Completely relying on an employer for retirement benefits is ill advised, but these plans are highly sought after since the idea is they will guarantee an income for life. Many boomers today may have participated in a pension without even realizing it. Take the time to research what you are entitled to if that’s the case, never leave free money on the table.

401(k) / Roth 401(k)

The 401(k) plan is probably the most common retirement vehicle in America. A 401(k) plan allows employees to contribute a portion of their earnings to an investment account automatically. Often (not always) an employer will “match” contributions. This match is based off the employer’s salary and their personal contribution to the account; like 100% match on 5% on an employee’s salary. Meaning if this person has a salary of $100k, and they set it up to contribute 5% each paycheck, at the end of the year both the employee and the employer have put $5k in this account. This is a total of $10k, half of which the employee got for free!

Standard 401(k) plan contributions are made with pre-tax wages. Meaning the person above would have ended the year with a taxable income of $95k. Check out the bracket to determine what your personal taxes might look like. What’s more is the invested contributions will grow tax free until withdrawals are made. No matter what money moves the Savvy Solo makes inside the 401(k) it’s sheltered from otherwise taxable events so long as the money stays in this account. Withdrawals in retirement are generally taxed as ordinary taxable income.

Many employers are starting to offer a Roth option to the 401(k). This means that contributions are counted towards your taxable income the year the contributions are made, but withdrawals in retirement are made tax free! The Roth 401(k) is relatively new, so the specific rules have been changing.

As of November 2024, the Roth 401(k):

• Has contribution limits the same as a traditional 401(k)
• The account must be held for 5 years
• RMDs are not enforced
• No age requirements
• Income limits enforced match that of the traditional 401(k)

Just like the 401(k), money invested in the Roth 401(k) will grow tax free as well as be sheltered from taxable events on money moves while the money stays in this account. This is an especially appealing option to those who have not hit their income potential yet, typically the younger folk. It’s not all or nothing either, so a Savvy Solo might decide to put a portion towards Roth and the rest towards traditional. It’s important to know the contribution limits and not exceed them when doing this.

403(b)

The 403(b) plan is generally offered to employees of public schools and non-profit organizations. Think teachers, school administrators, librarians, certain government employees, and sometimes even those in the medical field (among others). This vehicle is very similar to a 401(k) plan with a few differences.

Technically speaking, 403(b) plans are legally able to provide employer match on contributions. However, most employers offering the 403(b) plan do not offer a match. Consider this heavily when debating between job offers, a company match could result in retiring years earlier depending on the situation.

Also, investments within a 403(b) can sometimes be limited to high-fee mutual funds, or variable annuity contracts. 401(k)s can also be subject to this, but generally speaking the 403(b) will have fewer options. Typically, a plan provider for a 401(k) tend to be administered by mutual fund companies, while a 403(b) will commonly be administered by insurance companies.

Another difference here is the catch-up contributions. In a 403(b) plan, employees with at least 15 years of tenure with the same employer have the special option to “catch-up” with the lesser of:

• $3,000
• $15,000 reduced by the amount of elective deferrals made in prior years
• $5,000 X the number of years of work at the organization, minus the elective defferals made in prior years

You can also get the normal “catch-up” contributions that 401(k) holders have access to depending on your age. See irs.gov for more specifics on this one.

My teacher friends get calls from sleezy salespeople all the time about managing their 403(b), meanwhile I’ve never once received a call about my 401(k). Do not ever let some “financial advisor” (aka insurance salesperson) plan your future. A bit of SDB advice here: if you see the word annuity, RUN! The absolute best resource for learning more about your 403(b): 403bwise.org. It’s helped countless people manage their own investments, I’m confident it can help you too!

Most of the other aspects to the 403(b) match that of a 401(k). More of both are starting to offer a Roth option, and they have the same annual contribution limits, the same early withdrawal penalties, subject to RMDs etc.

457(b)

The 457(b) plan is usually the one that’s available to state and local government employees; occasionally nonprofit employees as well. Think of this like a 403(b) but made for state & local government officials, police officers, firefighters, and others. This vehicle operates like the others, with some key differences.

The main difference for a 457(b) plan is that there are looser rules of early withdrawals. Those who retire early or resign can start withdrawals without penalty no matter the age of the employee! 401(k)s and 403(b)s have a strict age limit of 59-1/2 years old, or else the employee will get hit with a 10% penalty. The key here is that you’ll have to stop working before withdrawals begin (barring “unforeseeable emergencies“).

Also, many 457 plans (unfortunately not the 457(b)) have no contribution limit at all. While the others are capped at a certain dollar amount per year, certain 457 plans may allow contributions up to 100% of income! In the FI community, I’ve heard of a number of cases where people were able to do this while living off separate passive income streams. Naturally this led to a very early retirement. The specifics on this tactic get a bit complicated, so be sure to consult a CPA and/or CFP before attempting.

Unfortunately, the 457(b) has the same contribution limits as the others. Moreover, should the employer decide to contribute, it would count towards the contribution limit. Much like the 403(b), employer match on 457 plans are exceedingly rare. Most of the other aspects of the 457(b) are similar or the same to that of the 401(k) or the 403(b).

TSP (Thrift Savings Plan)

The TSP is ordinarily only open to federal employees and uniformed service members. Think Army, Navy, and the President (among others of course 🤪). TSPs are widely regarded as the best employer sponsored retirement vehicle.

TSPs are very similar to 401(k)s. The main difference (other than who has access) is the investment options. Rather than choosing from set of privately run mutual funds, a TSP offers a choice of investing among 5 core ultra low-cost funds, or a target-date fund that combines all of these funds.

It’s very common for agencies to give a match to contributions, often around 5%. The general theme of a TSP is that it’s a 401(k) with lower cost investments that offer the same (if not better) return. The limited options have less of an “analysis paralysis” affect, thus resulting in better participation than other retirement vehicles.

If you are lucky enough to have access to a TSP, take full advantage! Contribution limits, Roth options, RMDs, etc. are all similar to that of the other employer sponsored retirement vehicles.

Traditional IRA

Individual retirement accounts (or IRAs) are available for just about anyone to take advantage of. These vehicles have significantly smaller contribution limits than an employer sponsored plan, but many can utilize both to help boost their retirement savings.

One of the biggest drawbacks to an employer sponsored plan is that the employee is subject to the custodian of the plan being offered, sometimes with limited investment options. The financial firm managing these retirement accounts for employees might be charging high fees and the employee doesn’t have much of a recourse. With an IRA individuals can pick what organization to invest their money, along with the ability to choose their own low-cost investments within that account.

The tax advantages of the traditional IRA are the same as many other vehicles. Contributions are made with pre-tax dollars, minimizing taxable income at the end of the year. The investments will grow tax sheltered until withdrawals are made, at which time will usually be taxed as ordinary income tax rates. Withdrawals made prior to age 59-1/2 will be subject to penalty, just like the 401(k).

If you have access to an employer sponsored retirement vehicle, some or all contributions may not be tax deductible with the traditional IRA. Be sure to factor in your MAGI and check the income limits before deciding to contribute to the traditional IRA, tax benefits might be limited.

Roth IRA

The Roth IRA is the single greatest retirement vehicle many of us have access to. Like Roth options with employer sponsored accounts, contributions are made with after-tax dollars. The investment then grows tax sheltered, and withdrawals are made tax free at retirement. Like a traditional IRA, the individual has full control over all investment decisions.

The best part of the Roth IRA is that contributions (not earnings) can be pulled out at any time for any reason without penalty! The vast majority of retirement vehicles have an age limit (most at 59-1/2 years old) before withdrawals can be made penalty free. With the Roth IRA, you’ll have the flexibility to pull contributions at any time!

Naturally, the Savvy Solo would plan to keep contributions in this account as long as possible for that tax free money to compound and grow over time. Still, it’s a great back up plan should something unexpected happen. Also, unlike most other vehicles, the Roth IRA isn’t subject to RMDs! The rules on inherited Roth IRAs are much more tax advantaged than other retirement accounts as well; it’s an excellent method of legacy building for those looking to leave their nest egg to loved ones.

Unfortunately, along with lower contribution limits (same as the traditional IRA), there are strict income limits on being allowed to contribute to a Roth IRA. In 2025 a solo needs to have a MAGI of $150k or less to contribute $7k ($8k if 50 or older). If the solo makes more than this in a given year, they would want to consider the backdoor Roth strategy (more on this in the future).

Solo 401(k)

The Solo 401(k), also known as the individual 401(k), most closely resembles an employer sponsored 401(k). This is widely regarded as the best retirement vehicle for those running a business without employees. Generally speaking, if there is a good chance that your company will have employees in the next few years this isn’t the best option.

In this vehicle, one can contribute to the plan as the employee and the employer, thus allowing for heavy contributions in short time towards retirement. This will tax shelter money for both the business owner and the business itself. Based on individual needs, the business owner can choose to make traditional contributions or Roth contributions.

The drawback to the Solo 401(k) is that they are generally more complex to maintain. It can take a lot more time and brain calories to keep up with the regulations than an IRA or other retirement options. You’ll face penalties from the IRS if not done correctly, so be sure to consult a professional if choosing to go this route.

Simplified Employee Pension IRA (SEP IRA)

Think of the SEP IRA as a traditional IRA with much higher contribution limits. This vehicle is best for small business owners with no or few employees. If there’s a chance your solo business might hire a few people in the coming months/years, the SEP IRA is considered the best path to take.

Contribution limits for a SEP IRA are up to 25% of the compensation (or a maximum of $70,000 in 2025). Like the Solo 401(k) it can streamline a high level of tax-sheltered retirement contributions that many don’t have access to. Roth contributions are also available in the SEP IRA.

The SEP IRA can be a bit easier to maintain than the Solo 401(k); most of the better financial institutions offering traditional IRAs will be able to offer the SEP IRA. The drawback with the SEP IRA is that employer contribution % to the business owner must be made available to all employees. If the business owner used 20% company match to maximize contributions to their own personal retirement, this 20% company match must be available to all employees.

Again, you’ll want to consult a professional here, but in general the SEP IRA is considered a solid option for business owners with a small number of employees.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

The SIMPLE IRA is designed for small business owners with 100 or fewer employees. This vehicle allows for higher contribution limits than the traditional IRA, but lower than a SEP IRA or Solo 401(k).

The SIMPLE IRA has less administrative work and lower costs for the business owner. Employers must make a matching contribution of either 3% of an employee’s annual compensation, or they must make a 2% non-elective contribution for each eligible employee. Like the SEP IRA, these are relatively easy to set up through the leading providers of traditional IRAs.

Because of its low-cost design, the SIMPLE IRA can be beneficial for employees to have lower cost investment options. However, the company match is generally lower than that of other investment vehicles. The lower contribution limit is also a tough one to swallow. Roth contributions are allowed while also contributing to a Roth IRA though (as long as you meet the eligibility criteria), so take advantage!

SAVE FOR RETIREMENT!

That is all.

😂

Good ol’ Uncle Bill is pretty adamant about this one. If you are being offered a company match, take that free money! Strategies from there can vary, but never leave money on the table like that (barring catastrophic life events). Saving today for that great big beautiful tomorrow is what financial independence is all about.

Not all retirement options are listed here, just an overview of the common ones. Do your due diligence on what retirement investment strategy is best for you. Be sure to check out the 2025 Retirement Contributions post. Feel free to message me if you have questions or want additional info!

Stay classy Solos! ✌️