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Gone are the days when workers could count on an employee pension plan and Social Security to cover their costs during those golden years. Today, pensions are a rarity and Social Security isn’t a slam-dunk for future generations.
That's why the government offers additional strategies to save for retirement, including tax breaks on retirement accounts. Here's how to find the best retirement plans to save for your future.
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What are the best retirement plans for you?
We'll walk you through the various types of retirement plans below. Find the situation that applies to you, and jump to the section about that retirement plan or account.
» MORE: If you want someone to help you, read our guide on how to choose a financial advisor.
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Eligible for an employer-run account?
If you have a 401(k) or other workplace retirement plan, you may want to contribute enough to get any free money offered by your employer via the company match. For more on the pros and cons of these plans, read our section on employer-sponsored retirement plans, including 401(k)s, 403(b)s, 457(b)s, defined benefit plans and TSPs.
Looking to set up an individual account?
If you’ve maxed out your 401(k) or you don’t have a retirement plan at work, jump to our section on the pros and cons of IRAs, including traditional and Roth.
» Find the best IRA account for you
Self-employed or a small-business owner?
Jump to our section about retirement accounts designed specifically for you, including the SEP IRA, solo 401(k), SIMPLE IRA and profit-sharing plans.
Human resource departments cover a lot during new employee orientation. Pay close attention, because there may be a pot of gold — information about a workplace retirement plan — buried in the pile of paperwork you’ve been asked to initial and sign.
There are two main types of employer-sponsored retirement plans:
Defined benefit plans: Perhaps you’ve heard references to pension plans. In years past, some companies guaranteed workers a set benefit in retirement. The company kicked money into a single retirement pool, and the pension plan invested it. These plans are rare now. Still, you might find an employer that makes annual contributions to a retirement plan based on a similar formula but without any guarantee of the benefit provided in retirement.
Defined contribution plans: These are now the most common type of workplace retirement plan. Employers set up these plans, such as 401(k)s and 403(b)s, to enable employees to contribute to an individual account within the company plan — typically via payroll deduction. If you come across the words “company match” in your benefits paperwork, that means you’ve got access to some free money: the company contributes to your account based on your personal contribution level (e.g., a dollar-for-dollar or 50-cents-on-the-dollar match up to, say, 6%).
» How much should you save? Check out our 401(k) calculator
Main advantages of defined contribution plans:
They're easy to set up and maintain. Most employers offer an automatic payroll deduction option for deposits into the plan, and the retirement plan administrator (a separate financial institution) handles statements, disclosures and updates.
Your employer might match a portion of your contribution.
401(k) contribution limits are higher than those for IRAs.
Employee contributions (to non-Roth plans) reduce your taxable income for the year. Because of that upfront tax break, you'll owe taxes on the withdrawals you make in retirement. Roth 401(k) contributions don't offer any immediate tax break; contributions are made with after-tax money. However, withdrawals from the account are tax-free in retirement.
The Roth 401(k) has no income restrictions, unlike the Roth IRA.
Main disadvantages of defined contribution plans:
Investment choices within employer-sponsored retirement plans are limited to certain funds, leaving you with fewer options than in an IRA. If you have limited retirement dollars, here’s how to decide if it’s better to invest in an IRA or a 401(k).
Management and administrative fees can be high and erode your investment returns over time.
New employees might have a waiting period before they can contribute to a plan (e.g., 30 to 90 days of employment).
Employer match contributions might be subject to a vesting schedule, in which money becomes the property of employees only after they have worked for the company for a certain amount of time.
5 types of employer-sponsored retirement plans
Pros | Cons | Good to know | |
|---|---|---|---|
401(k)/Roth 401(k) |
|
| Roth 401(k) requires you start taking minimum distributions at age 73, unlike a Roth IRA (Roth IRAs have no required distributions). |
403(b) (aka TSA or Tax-Sheltered Annuity) |
|
| Employees with 15 years of service might qualify for $3,000 in catchup contributions each year for 5 years. |
457(b) |
|
| Participants might qualify for the saver’s credit. |
Defined Benefit Plan |
|
| Participants have less control over contribution amounts and investments. |
TSP (Thrift Savings Plan) |
|
| Federal employees also have a defined benefit plan. |
Sources: IRS.gov, TSP.gov, 403bwise.com
IRAs
The IRA is one of the most common retirement plans. An individual can set up an IRA at a financial institution, such as a bank or brokerage firm, to hold investments — stocks, mutual funds, bonds and cash — earmarked for retirement.
The IRS limits how much an individual can contribute to an IRA each year, and depending on the type of IRA (here's a rundown of 7 types of IRAs), decides how the funds are taxed — or protected from taxation — when a participant makes deposits and withdrawals.
Main advantages of IRAs
They put you in the driver’s seat. You choose the bank or brokerage and make all the investment decisions, or hire someone to make them for you.
Depending on the type of IRA you choose — Roth or traditional — and based on your eligibility, you decide how and when you get a tax break.
IRAs provide a much wider range of investment choices than workplace retirement plans do.
If you qualify for both a Roth and a traditional IRA in the same year, you can contribute to both. Your total contributions must remain below the combined IRA contribution limit. But the "two-fer" does get you some tax diversification in your retirement portfolio.
If you like the idea of opening an IRA, be sure to look for a provider with low fees.
Main disadvantages of IRAs
Another consideration in the IRA vs. 401(k) debate, is that IRAs have lower annual contribution limits than most workplace retirement accounts:
In 2023, the maximum amount you can put in an IRA is $6,500. If you're 50 or older, you can contribute $7,500. You can contribute to an IRA for 2023 through the April tax-filing deadline in 2024. In 2024, you can contribute $7,000, with the same extra $1,000 catch-up contribution, through the April tax filing deadline in 2025.
The annual maximum for 401(k)s, on the other hand, is $23,000 (and $30,500 with a catch-up) in 2024.
Roth IRA contribution limits are based on your modified adjusted gross income. The amount you're allowed to contribute begins to decrease once you hit $138,000 (single taxpayers) or $218,000 (married filing jointly taxpayers) in 2023. Those numbers increase to $146,000 and $230,000 respectively, in 2024.
With a traditional IRA, anyone can contribute, no matter what their income. But your ability to deduct your contributions may be limited if you (or your spouse) has a retirement plan at work. If you do, check out the IRA contribution limits.
Choosing between a Roth and a traditional IRA requires you to guess what your tax situation will be when you start drawing from the account. For some, the immediate tax break of the traditional IRA might make that account more appealing; for others, the prospect of tax-free income in retirement makes the Roth the clear winner. We argue in our Roth vs. traditional IRA comparison that the Roth is a better choice for most eligible retirement savers.
Retirement accounts for small-business owners and self-employed individuals
According to a 2022 Bureau of Labor Statistics report, 28% of workers don't have access to a workplace retirement plan. At companies with fewer than 100 workers, roughly half of employees are offered a retirement savings plan.
If you work at or run a small company or are self-employed, you might have a different set of retirement plans at your disposal. Some are IRA-based, while others are essentially single-serving-sized 401(k) plans. And then there are profit-sharing plans, which are a type of defined contribution plan.
Main advantages of plans for the self-employed:
Plans for contractors, the self-employed and small-business owners have higher contribution limits than most employer plans and IRAs.
These plans often offer more investment choices than employer-sponsored plans, such as 401(k)s.
Many of these plans are easy to set up and therefore not much of a burden on the employer — that's you, if you're a small-business owner.
You might be able to set up your account at a financial institution you already use.
If you're self-employed, you can give yourself a generous profit-sharing contribution, plus make your elective deferral — with catchup — as the employee.
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Main disadvantages of plans for the self-employed:
Employer contributions might be completely discretionary, putting more of the savings burden on employees/plan participants.
Setup and administrative duties for more complicated plans fall to the employer — which might be you.
Some plans have narrower parameters for allowable early withdrawals than traditional IRAs and employer-sponsored retirement plans.
Loans from some plans must meet certain requirements and require the participant to apply.
For the self-employed, the profit-sharing cap boils down to about 20% of net profits because of Federal Insurance Contribution Act taxes due on net profits.
