Bronze, Silver and Gold pension accounts

Many people have spent the past few weeks glued to their TV screens watching elite athletes from around the world compete. And while many of these superstars have won their share of medals, we at The Fool believe there is another category worth recognizing: pensions.

Listen to me. Without tax-efficient pension plans, many people would have a much harder time accumulating funds for their retirement years. And so with that in mind, here are the rewards for the best retirement accounts.

The bronze medal goes to …

The traditional 401 (k). The reason? These plans allow you to contribute up to $ 19,500 per year before tax if you are under 50. If you are 50 or older, you get a generous catch-up contribution of $ 6,500 which brings your total to $ 26,000. All in all, you can protect a large chunk of your immediate income from taxes while saving a lot of money for the future.

Now, there’s a reason why traditional 401 (k) fails to win gold, and that’s because you usually get limited investment choices in these plans. But, nowadays, a lot of 401 (k) are out of low cost index funds, and these are a great choice for long term investors.

The silver medal goes to …

The Roth 401 (k). These plans have the same contribution limits as the traditional 401 (k). And while they don’t offer immediate tax relief on contributions, they do offer something better – tax-free withdrawals during retirement.

Now, some people prefer to get tax relief up front, and that’s understandable. But think of it this way – would you rather not have to deal with the IRS taking some of your money now, or when you’re older and your options for earning more might be limited? Not having to worry about taxes could allow for a more relaxed and stress-free retirement, as the Roth 401 (k) is a cut above its traditional counterpart.

The gold medal goes to …

The Roth IRA. Roth IRAs have their drawbacks. They only allow you to contribute up to $ 6,000 per year ($ 7,000 if you’re 50 or older) and higher earners can’t fund one directly. Rather, they have to put the money into a traditional IRA and then convert it to Roth.

But here’s why the Roth IRA wins gold. First, earnings in a Roth account are tax-free and withdrawals are tax-free in retirement. And as we just discussed, getting rid of that IRS burden is nice.

On top of that, the Roth IRA is the only tax-advantaged retirement plan that does not impose required minimum distributions, or RMDs. What RMDs do is effectively force you to spend your savings over the course of your life, so if your goal is to leave money to your heirs, that’s a problem.

Roth IRAs do not have an RMD. This means you can let your money sit and grow – in a tax-efficient way – for as long as you want. Roth IRAs are also flexible in that you can withdraw your major contributions at any time without penalty. And while you should ideally leave that money alone for retirement, some people open a Roth IRA for the express purpose of saving for college.

Which package will you choose?

Well, it was fierce competition, but eventually the Roth IRA came home with the gold. In the meantime, if you haven’t opened a retirement plan yet, it’s worth exploring all of these options. The sooner you start, the greater your chances of accumulating a substantial pile of wealth that will serve you well once your time in the workforce is over.