What Are the Different Retirement Accounts?

Americans are dangerously underprepared for retirement. According to the Federal Reserve's Report on the Economic Wellbeing of U.S. Households, the average American has less than $60,000 saved in their retirement accounts.

What's more, 31% of Americans have absolutely nothing saved for retirement. Of that group, 19% are between the ages of 55 and 64.

retirement accountsThe report also says 24% of Americans have given "only a little thought to financial planning for their retirement," while 25% "had done no planning at all."

With so many Americans ill-prepared for retirement, Money Morning can help. We'll start by answering one of the most commonly asked questions about retirement: "What are the different retirement accounts?"

Whether you're well on your way to retirement or are just starting your retirement planning, there are always ways to more effectively grow your nest egg.

Here is a breakdown of the most common retirement accounts, and the advantages of each...

Types of Retirement Accounts No. 1: 401(k) or 403(B)

Employer-sponsored 401(k) and 403(b) plans are the most popular retirement accounts.

The two plans are very similar, but a 401(k) is provided by for-profit organizations. A 403(b) is provided by tax-exempt corporations like hospitals, schools, or religious groups. Each account is named after the section of the tax code they fall into.

Through these retirement accounts, money is withheld from the employee's paycheck and is directly deposited into the plan. The contribution is made on a pre-tax basis; it is not taxed until the money is withdrawn.

Those under the age of 50 can save up to $18,000 per year pre-tax in 2015. Those over the age of 50 can save up to $24,000 per year pre-tax.

If you leave your job, contributions can be easily rolled over into the new employer's plan. However, withdrawals from these accounts by anyone under the age of 59-and-a-half are subject to a withdrawal penalty.

In many cases, the employer will match the employee's contribution up to a certain percentage point. If your employer will match a portion of your contribution, a 401(k) or 403(b) might be the right retirement account for you.

Continue reading for four more popular types of retirement accounts...

Types of Retirement Accounts No. 2: Individual Retirement Account (IRA)

An Individual Retirement Account (IRA) allows anyone under 50 to contribute up to $5,500 per year. Those over 50 are allowed to contribute up to $6,500 per year. Money in an IRA grows tax-free for the duration of the account.

While 401(k) accounts are provided by employers, IRAs are accounts you set up on your own. However, some IRAs can be opened by small business owners or by those who are self-employed.

Like a 401(k), funds from traditional IRAs are taxed upon withdrawal.

Unfortunately, there are some restrictions on IRAs based on income and employment status. Be sure to check with your financial institution on any restrictions prior to opening an account.

An IRA is a great way to supplement your savings. Many investors will contribute to an IRA as well as a 401(k).

Types of Retirement Accounts No. 3: Roth 401(k) and Roth IRA

Roth 401(k)s and Roth IRAs operate similarly to the traditional accounts, except the taxes are taken out before the contribution is made.

So when the money is eventually withdrawn in retirement, those withdrawals are tax-free.

This strategy is used by people who think they will be in a higher tax bracket by the time they retire. They are willing to be taxed now at a presumably lower rate.

A Roth account is also popular among people who think the tax rate will rise by the time they retire. While there is no way to predict what the future tax rate will be, Roth accounts are common during low-rate tax periods.

A Roth IRA will have income restrictions like a traditional IRA, while a Roth 401(k) will not.

Types of Retirement Accounts No. 4: Health Savings Account (HSA)

Health Savings Accounts or HSAs allow you to contribute up to $3,500 per year for an individual and $6,500 for a family. If you're over 55, you can contribute an extra $1,000.

These accounts let you withdraw money for medical expenses like copays or items like eyeglasses. Any money you don't spend rolls over, without limit.

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But once you've reached the age of 65, you can begin withdrawing money from your HSA account for any reason without penalty. The money will be taxed, but it is a nice way to supplement your income.

Types of Retirement Accounts No. 5: SEP IRA

A Simplified Employee Pension (SEP) is a type of IRA for small-business owners or self-employed workers.

Contributions are tax-deductible and go into a traditional IRA in the employee's name. However, employees cannot contribute; only the employer can. The money is taxable upon withdrawal.

The biggest advantage of an SEP IRA is a higher contribution limit. In 2010, business owners were able to contribute either 25% of their income or $49,000, whichever is lower.

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Editor's Note: Setting up a retirement account and making steady contributions may not be enough to fund your retirement. That's why Money Morning's Resource Specialist Peter Krauth is recommending this new investment. It has the potential to not only completely fund your retirement, but the retirements of your children as well...