How To Choose the Right Retirement Account for Your Financial Goals

Have you ever wondered which retirement account perfectly fits your financial aspirations?

With many options available, each offering distinct advantages and considerations, it’s no surprise that understanding retirement savings can feel daunting.

But don’t worry. This guide will explore retirement accounts, empowering you to make decisions to achieve your unique financial goals. Let’s dive in!

Understanding Traditional, Roth, and SEP IRAs

Traditional IRA (Individual Retirement Account)


  • Save on taxes: When you add money to a Traditional IRA, you might pay fewer taxes that year because the amount you put in can be taken away from the money you have to pay taxes on.
  • Grow your money tax-free: Any money you make from investing in your Traditional IRA isn’t taxed until you withdraw it, so your savings can grow faster.
  • Income flexibility: Traditional IRAs do not impose income restrictions on contributions. This flexibility makes them accessible to individuals across various income levels who may not qualify for a Roth IRA due to income restrictions.


  • Taxes when you take money out: When you retire and start taking money out of your Traditional IRA, you have to pay taxes on it as if it were regular income, which could mean giving a portion back to the government.
  • Required Minimum Distributions (RMDs): Beginning at age 72 (as of 2022), you must start taking distributions from your Traditional IRA. These withdrawals are mandatory and subject to taxation, which may influence your retirement income plan and potentially move you into a higher tax bracket.

Eligibility criteria

  • Earned income: If filing jointly, you (or your spouse) must have a job or be self-employed to contribute.
  • Age restrictions: There is no age limit for contributing to a Traditional IRA. However, there are age-related rules for contributions and withdrawals.
  • Consider employer plans: If your job offers a retirement plan, it might affect how much you can contribute and if you can deduct those contributions from your taxes.

Contribution limits

As of 2022, if you’re under 50, you can put up to $6,000 a year into a Traditional IRA. But if you’re 50+, you can contribute up to $7,000 annually, which includes extra catch-up contributions. These limits are subject to change based on IRS (Internal Revenue Service) regulations and may be adjusted periodically.

Tax implications

Save now, pay later: Putting money into a Traditional IRA can lower your taxes now, but you’ll pay taxes later when you retire.

Withdrawal taxes: When you withdraw money from your Traditional IRA in retirement, you’ll have to pay taxes as if it were regular income, which could affect how much you have left to spend.

Roth IRA


  • Tax-free withdrawals: Qualified withdrawals during retirement are entirely tax-free. This benefit means you can enjoy your retirement income without paying taxes on your withdrawals.
  • Flexibility in withdrawals: Unlike Traditional IRAs, Roth IRAs offer the flexibility to withdraw your contributions (excluding earnings) without incurring penalties or taxes. It provides greater adaptability during unforeseen financial challenges or emergencies.
  • No RMDs: Roth IRAs do not have RMDs during the account holder’s lifetime. This means you can leave the funds to grow tax-free for as long as you wish, providing more flexibility in estate planning.
  • Tax diversification: Having both pre-tax (e.g., Traditional IRA, 401(k)) and after-tax (e.g., Roth IRA) retirement savings provides tax diversification, allowing you to manage your tax liability more efficiently in retirement.


  • Income limits: High-income earners may not be eligible to contribute directly to a Roth IRA. It’s because of income limitations imposed by the IRS. However, they can explore strategies like the “backdoor Roth IRA” method to circumvent these limits.
  • No immediate tax deduction: Unlike Traditional IRAs, contributions to a Roth IRA come from your paycheck after taxes are taken out, so you don’t receive an immediate tax deduction. This could be perceived as a drawback for individuals seeking upfront tax benefits.

Eligibility criteria

  • Income limits: For the tax year 2023, single filers should have a modified adjusted gross income (MAGI) of not more than $144,000, and married couples filing jointly must have a MAGI of less than $214,000 to contribute the maximum amount to a Roth IRA.
  • Contribution source: Contributions to a Roth IRA must come from earned income, such as wages, salaries, bonuses, or self-employment income. Ineligible sources include investment income or retirement account rollovers.

Contribution limits

  • Annual limit: You can put up to $6,000 annually into a Roth IRA if you’re under 50. If you’re 50+, you can earn up to $7,000 a year. That’s called a “catch-up” contribution.
  • Contribution phase-out: If you make between $129,000 and $144,000 (if single) or $204,000 and $214,000 (if married), you might not be able to put in as much.

Tax implications

  • Tax-free growth: All earnings and capital gains within a Roth IRA grow tax-free, providing an opportunity for significant wealth accumulation over time.
  • No tax deduction: You don’t get a tax break when you put money into a Roth IRA. This means you’re using money you’ve already paid taxes to fund the account. However, qualified withdrawals, including earnings, are tax-free during retirement.

SEP IRA (Simplified Employee Pension)


  • High contribution limits: SEP IRAs allow for generous contribution limits, making them attractive for those who want to maximize their retirement savings. Individuals can contribute a maximum of $61,000 annually or up to 25% of their net earnings from self-employment. This is beneficial for those experiencing income fluctuations.
  • Simplicity and flexibility: Setting up and administering a SEP IRA is simpler than other retirement plans. There are no complex compliance requirements or annual reporting obligations. Moreover, contributions are optional, allowing you to decide the amount you wish to contribute annually, depending on your business’s financial performance.
  • Tax benefits: Contributions to a SEP IRA are tax-deductible. It can help lower your taxable income for the year you contribute. This can result in immediate tax savings, helping to reduce your current tax bill while simultaneously building your retirement nest egg.


  • Employee eligibility: SEP IRAs require employers to contribute the same amount based on their employees’ earnings. So, if a business has workers, it has to give the same perks to everyone who qualifies, which might be expensive for big companies with many employees.
  • Limited withdrawal flexibility: Just like with Traditional IRAs, early withdrawals from a SEP IRA before reaching 59 ½ can incur a 10% penalty, along with regular income tax obligations. This lack of flexibility may be a drawback for individuals anticipating needing access to their retirement funds before retirement age.

Eligibility criteria

  • Self-employed individuals, including sole proprietors, freelancers, and independent contractors.
  • Employers with one or more employees, regardless of business structure (e.g., sole proprietorship, partnership, corporation).
  • No age restrictions or income limitations.

Contribution limits

  • As of 2022, employers can contribute up to 25% of net earnings from self-employment or 20% of their net earnings if they are sole proprietors.
  • The maximum contribution cap for 2022 is $61,000.

Tax implications

  • Contributions to a SEP IRA are tax-deductible, reducing your taxable income for the year the contribution is made.
  • Withdrawals from a SEP IRA during retirement are taxed as ordinary income. However, if withdrawals are made before age 59 ½, they may be subject to a 10% penalty, besides ordinary income tax.

How To Choose the Right Retirement Account

Choosing the right retirement account requires careful consideration of your financial goals, tax situation, and investment preferences.

If you’re considering opening an IRA account online, SoFi Invest offers many investment options. They provide a 2% contribution matching program, helping you grow your retirement savings even faster.

Assess your retirement goals

Start by envisioning your ideal retirement lifestyle, considering travel plans, hobbies, and healthcare needs. Decide when you want to retire and estimate your anticipated expenses during retirement, including housing, healthcare, and leisure activities.

Additionally, consider any financial obligations or dependents and potential retirement income sources, like Social Security benefits or rental properties. This thorough evaluation will empower you to decide which best suits your needs and aspirations.

Educate yourself

When it comes to retirement preparation, knowledge is power. Take the time to explore each retirement account type, understanding its basic features and implications for your financial future. Explore resources such as reputable financial websites, books, and online courses dedicated to retirement planning.

Additionally, consider seeking guidance from financial advisors or tax professionals who can provide personalized insights tailored to your circumstances. Remember, investing in education now can yield significant dividends in the form of financial security and peace of mind down the road.

Review your retirement savings strategy regularly

Life is dynamic, and factors such as changes in income, expenses, tax laws, and investment performance can impact your retirement plan.

By scheduling periodic check-ins, such as annually or biannually, you can assess your retirement savings progress, adjust contributions if necessary, and rebalance your investment portfolio to maintain optimal growth potential while managing risk.

Plus, reviewing your retirement plan allows you to adapt to any life changes, such as marriage, parenthood, career advancements, or unexpected financial challenges. It ensures that your retirement savings strategy remains flexible and resilient over time. Regular review and adjustment empower you to stay on track toward achieving your retirement dreams with confidence and peace of mind.

Selecting the ideal retirement account is crucial to achieving financial security in your golden years. Remember, the key is to start early, contribute consistently, and regularly reassess your strategy to ensure a comfortable retirement lifestyle.