Top of main content

Which retirement account is best for you?

With people living longer, healthier and more active lives, retirement is not what it used to be. It can be full of opportunities and adventure, centered around family, travel, business ideas, or whatever means most to you.

One of the key elements to retirement planning is choosing the right type of accounts for your money – to make sure it works hard for you over a long period of time.

The different types of retirement accounts

Your employer may offer one or multiple retirement accounts to choose from. If you don’t have access to an employer-sponsored account, others are available.

Each retirement option differs based on:

  • When assets in the account are taxed
  • Contribution limits
  • Whether the account is sponsored by your employer, or not

The most common retirement account options in the U.S.

Your income bracket, how much you can contribute every year, and when you might want to withdraw your money are all factors to consider when choosing a retirement account.

Here we cover 5 of the most common plans, both employer-sponsored and individual retirement accounts.

This is a high level overview, please consult the IRS website or your personal tax advisor.

401(k)

Summary

  • Employer sponsored
  • You decide how much to save and the investment strategy, within contribution limits set annually by the IRS
  • Some employers may match your contribution up to a certain percentage of your income
  • Suitable if you’re likely to be in a lower income  tax bracket when you retire

Funding information

  • Contributions
    Funded with pre-tax dollars, the assets grow pre-tax until you make a withdrawal
  • Withdrawals
    Taxed as ordinary income when withdrawn and penalty free if withdrawn after age of 59 ½
  • Required minimum distribution
    Must start taking distributions no later than the age of 73**; withdrawals before the age of 59 ½ are subject to a 10% penalty tax

Roth 401(k)

Summary

  • Similar to the traditional 401(k), but funded with after-tax dollars
  • Suitable if you’re likely to be in a higher income tax bracket when you retire
  • You can contribute to both a 401(k) and a Roth 401(k) – within contribution limits set annually by the IRS  – if your employer offers them

Funding information

  • Contributions
    Funded with after-tax dollars, the assets grow until you make a withdrawal
  • Withdrawals
    Tax-free and penalty free if over the age of 59 ½ and the account has been held for 5 years
  • Required minimum distribution
    Must start taking distributions no later than the age of 73**; withdrawals before the age of 59 ½ are subject to a 10% penalty tax

403(b)

Summary

  • Employer sponsored
  • Allows tax-deferred contributions
  • Offered by non-profit organizations and government agencies

Funding information

  • Contributions
    Funded with pre-tax dollars, the assets grow pre-tax until you make a withdrawal
  • Withdrawals
    Taxed as ordinary income when withdrawn
  • Required minimum distribution
    Must start taking distributions no later than the age of 73**; withdrawals before the age of 59 ½ are subject to a 10% penalty tax

Traditional Individual Retirement Accounts (IRAs)

Summary

  • Suitable if your employer doesn’t offer a work-sponsored plan – especially if you’re likely to be in a lower income tax bracket when you retire and want investment flexibility

Funding information

  • Contributions
    Funded with pre-tax dollars, the assets grow pre-tax until you make a withdrawal
  • Withdrawals
    Taxed as ordinary income when withdrawn and penalty free if withdrawn after the age of 59 ½
  • Required minimum distribution
    Must start taking distributions no later than the age of 73**; withdrawals before the age of 59 ½ are subject to a 10% penalty tax

Roth IRA

Summary

  • Suitable if you fall below the annual income threshold and are likely to be in a higher income tax bracket when you retire

Funding information

  • Contributions
    Funded with after-tax dollars, you can only make contributions if your annual income is below certain thresholds set annually by the IRS
  • Withdrawals
    Tax-free and penalty free if over the age of 59 ½ and the account has been held for 5 years
  • Required minimum distribution
    None

Alternative sources of retirement income

In addition to a retirement account, you might receive supplementary income in retirement from either a pension or social security.

Pension

A pension plan is established and maintained by an employer for the benefit of its employees and their beneficiaries, either for a set number of years in retirement or for their lifetime after they retire. Retirement benefits from a pension plan are typically determined by the number of years an employee worked for the employer and the amount they were paid during that time.

Social security

For many Americans, Social Security can be an important source of income in retirement. It’s offered by the U.S. government to qualified individuals and their families to replace employment earnings. You must pay into the Social Security program during your time in the workforce and generally must accrue 40 work credits to qualify for benefits.

If you qualify for Social Security, the amount you receive is determined by your earnings history and age.

One of the top considerations for Social Security is timing. You can file for Social Security benefits once you reach the age of 62, but the longer you can wait, the higher your annual payment will be until you reach the age of 70, when benefits stop increasing. You can choose to take Social Security later, even when you retire.

Source: SSA.gov

Should you include insurance in your retirement plan?

No matter how well you’ve prepared, there’s always a risk that the plan doesn’t go according to plan. And it’s on those occasions that you’ll be grateful for insurance, as it can help to ensure that you have enough money to maintain your living standards.

This is especially critical if one day you may require potentially costly long-term care. So, including long-term care insurance or a cash value accumulation policy in your retirement plan can be a great solution.

For more information on including insurance in your retirement plan, speak to your Wealth Relationship Manager, who can connect you with one of our insurance specialists.

How we can help with your retirement planning

Retirement planning is a continual process. Major life events or changes to state and federal laws related to tax and planning matters could mean you need to adjust your plan. So once you’ve created one, review it regularly with your Wealth Relationship Manager to make sure it still fits with your circumstances and goals.

Retirement can be full of opportunities, and though we can’t always anticipate what lies ahead, with the right preparation and guidance, you can be confident about the future. We can work with you to create a holistic retirement plan that balances strategic investing, planning, saving and spending strategies. There are many vehicles that can put you on the road to your retirement dreams.

Back to top  

You may also be interested in

Explore more

Do your future self a favor and start thinking about planning for your retirement today with this quick and easy guide..
Streamline your retirement planning process by following this quick and easy retirement planning checklist.
Learn how to manage your money, protect your wealth and understand cross border rules and regulations.

Disclaimers

Investment, annuities, and variable life insurance products are offered by HSBC Securities (USA) Inc. (HSI), member NYSE/FINRA/SIPC. In California, HSI conducts insurance business as HSBC Securities Insurance Services. License #: OE67746. HSI is an affiliate of HSBC Bank USA, N.A. Whole life, universal life, term life, and other types of insurance are offered by HSBC Insurance Agency (USA) Inc., a wholly owned subsidiary of HSBC Bank USA, N.A. Products and services may vary by state and are not available in all states. California license #: OD36843.

Investments, Annuity and Insurance Products: Are not a deposit or other obligation of the bank or any of its affiliates; Not FDIC insured or insured by any federal government agency; Not guaranteed by the bank or any of its affiliates; and subject to investment risk, including possible loss of principal invested.

All decisions regarding the tax implications of your investment(s) should be made in connection with your independent tax advisor.

HSBC Securities (USA) Inc., HSBC Insurance Agency (USA) Inc., and HSBC Bank USA N.A. (collectively “HSBC”) does not provide recommendations or advice on any products based on Environmental, Social & Governance (“ESG”) or Sustainable Investing (“SI”) considerations except in its discretionary solution(s) specifically dedicated to ESG/SI. Additionally, HSBC reserves the right to not recommend, or trade securities based on HSBC Group’s* internal policies, including its sustainability policies. Customers can purchase ESG/SI related products on our platform on a self-directed basis. Any ESG/SI macroeconomic statements or promotional materials generated by other HSBC Group entities may not reflect the views of HSBC. For more information, see our general ESG/SI disclosure.

*HSBC Group refers to HSBC’s global affiliates.


United States persons are subject to U.S. taxation on their worldwide income and may be subject to tax and other filing obligations with respect to their U.S. and non-U.S. accounts. U.S. persons should consult a tax adviser for more information.

The materials and information on this site have been prepared for educational and informational purposes only and should not be considered legal advice and are not intended to provide, and should not be relied on for, tax, legal or accounting advice. No information published on the site constitutes a solicitation, offer or recommendation to enter into any investment strategy or transaction. The information and materials herein are not and are not intended to be investment advice. They are being provided solely on the basis that they will not constitute investment advice and will not form a primary basis for any person’s or plan’s investment decisions, and HSBC is not a fiduciary with respect to any person or plan by reason of providing the material or content herein. Prior to making any financial decision, individuals should seek advice from their personal financial, legal, tax and other financial professionals that take into account all of the particular facts and circumstances of their own situation.

**Subject to periodic changes in the tax laws, consult IRS.gov or your personal tax advisor.