Don’t you just love Saturdays? Well, in retirement, every day is Saturday. That’s the goal, at least, but to get there, you’re going to have to save, save, save. And a standard savings account isn’t going to cut it.
Instead, to save enough, you’ll need to strategically choose not just which investments you’ll make, but which retirement plans you’ll use to make them.
Americans have access to a variety of retirement accounts—though which ones they have access to largely depend on their employment situation. Some accounts are available through most businesses, others are only available through small businesses, and a few are available to anyone, whether they’re a W-2 worker, self-employed, or won the lottery and sit around counting their cash.
In this article, I’ll dive into detail about the best retirement plans for every type of employment situation. I’ll guide you through the pros and cons of each plan, eligibility requirements, and more. Plus, you’ll also get the answers to common questions about retirement plans.
And remember: In many cases, you can combine several of the accounts below to maximize their tax advantages and reach your every-day-is-Saturday retirement savings goal.
What Is a Retirement Plan?
First things first: A retirement plan is actually a nickname for any vehicle that enables you to save money toward retirement. The general idea? You invest money earlier in life that grows over time and eventually can be used to replace your income once you’re no longer working.
Traditionally speaking, they’re broken out into two types of employer-based accounts: defined contribution plans (401(k)s, 403(b)s, etc.) and defined benefit plans (pensions, cash balance plans). But there are other accounts that individuals can use to anchor or augment their retirement savings, such as traditional and Roth individual retirement accounts (IRAs).
Which Retirement Account Is Best for Your Savings?
Your search should begin where you work. That’s because employer-sponsored retirement plans …
- Are extremely easy to participate in (your money is automatically funneled into the account).
- Typically offer tax advantages.
- Sometimes involve the employer matching a portion of your contributions (such as a 401(k). That’s free money, which is pretty unbeatable.
But make sure to check eligibility requirements for the different plans I list below. For example, some accounts are reserved for small-business owners, while others have income limits for who can contribute.
Once you know which accounts you qualify for, you can compare other aspects, such as contribution limits, tax benefits, distribution requirements, and more. Remember: You aren’t limited to a single retirement account. If one account doesn’t fit all of your needs, have multiple accounts to better prepare yourself for retirement.
Defined Contribution Plans
A defined contribution plan is an umbrella term for any workplace account where you save and invest your money with the goal of growing it enough that you can safely retire.
This type of retirement plan comes with no guaranteed benefit amount. How much you get out of the account pretty much depends on how much you put into it yourself and how well your investments do. Employers sometimes kick in money to help out, but the real responsibility lies with you.
The following are employer-sponsored defined contribution plans:
A 401(k) is one of the most popular employer-sponsored retirement plans for large companies. This account lets employees contribute a portion of their wages, before taxes, to individual accounts. Because these contributions are pre-tax, they can reduce one’s taxable income.
As for 401(k) contribution limits: For 2024, employees can contribute up to $23,000 per year into their 401(k)s (up from $22,500 in 2023). And anyone who is 50 or older can put in an additional $7,500 per year (in both 2023 and 2024) as a catch-up contribution. That makes a grand total of $30,500 in 2024 (and $30,000 in 2023) for those folks.
Employers are not required to contribute to an employee’s 401(k), but they can, and many do. Usually, employers will match an employee’s contribution up to a predetermined percentage. For example, the company might match contributions up to 5% of an employee’s income.
Taxes don’t need to be paid on 401(k) earnings until you start pulling money out during retirement; those distributions will be taxed as ordinary income. Any withdrawals from a 401(k) plan made before age 59½ face a 10% early distribution penalty.
The SECURE 2.0 Act of 2022 increased the age when people with 401(k) plans need to take required minimum distributions (RMDs). The age is currently set to 73 and it will rise to 75 beginning in 2033. RMDs also are taxed as ordinary income.
There is also a Roth 401(k) version of the plan. A Roth 401(k) is funded with after-tax dollars. Rather than reducing your taxable income that year, the earnings grow tax free and withdrawals are tax free during retirement.
From 2024 onward, the SECURE 2.0 act made it so required minimum distributions are no longer necessary for Roth 401(k) plans.
A 403(b) plan is the 401(k) equivalent for employees of public schools, some 501(c)(3) tax-exempt organizations, and certain ministers.
These retirement plans let employees contribute a portion of their salaries. The employer is allowed to contribute but is not required to contribute. A 403(b) plan is funded with pre-tax contributions, and the earnings grow tax deferred.
Just like with 401(k)s, the maximum amount of elective deferrals is typically the lesser of 100% of includible compensation up to $23,000 in 2024 (again, up from $22,500 in 2023). If you’re 50 or older, you can also kick in up to $7,500 per year as a catch-up contribution for both 2024 and 2023. Note that the total limit is reduced if employees have other retirement plans, such as a 401(k), SIMPLE IRA, or SEP IRA.
It has the same withdrawal age (59½), early withdrawal penalty (10%), and RMD rules as a 401(k), and withdrawals are taxed the same way.
There are also Roth 403(b) plans funded with after-tax dollars that provide tax-free withdrawals during retirement.
A 457(b) plan is the 401(k) equivalent for employees of certain state and local governments and non-government entities that are tax exempt under Internal Revenue Code (IRC) Section 501.
Tax treatment is different depending on whether plans are eligible or ineligible under IRC 457(b). Eligible plans let employees of sponsoring organizations make tax-deferred contributions. Earnings are also tax deferred. Ineligible plans might receive different tax treatment under IRC 457(f).
457(b)s have the same contribution limits as a 401(k). The penalty for early withdrawals is also the same as that for a 401(k). So, don’t withdraw funds before age 59½, unless you’re willing to pay an additional 10% penalty. Withdrawals are taxed as ordinary income. You’ll need to begin required minimum distributions at age 73. The age rises to 75 in 2033.
Also, a 457(b) plan can be amended to allow designated Roth contributions as well as in-plan rollovers to designated Roth accounts. Roth accounts are exempt from RMDs.
Thrift Savings Plan (TSP)
A thrift savings plan (TSP) is similar to a 401(k), but it’s only available to federal employees and uniformed service members. Eligible people can set up their own accounts.
Workers who don’t contribute to their TSPs will receive government contributions equal to 1% of their annual salaries. Those who contribute a percentage of their pre-tax income will get that matched by the government up to 5% of their salary.
Taxes don’t need to be paid on the contributions until retirement; withdrawals are taxed at ordinary income rates. Participants choose among a limited number of investment funds.
Like a 401(k), the contribution limit is $22,500 (in 2023) or $23,000 (in 2024), with employees 50 and older allowed to make catch-up contributions of $7,500. It also has the same 10% penalty as a 401(k) if you take distributions before age 59½.
Required minimum distributions begin at age 73, or 75 starting in 2033. These accounts only let you withdraw monthly, quarterly, or annually.
There is also an option to invest in a Roth version of the program. With a Roth TSP, you contribute after-tax dollars and then withdrawals aren’t taxed during retirement.
Note that if you leave the private sector to work in the public sector, you can roll over a 401(k) or IRA into a TSP and vice versa if switching from the public to private sector.
Simplified Employee Pension (SEP) IRA
A SEP IRA is a variation of the individual retirement account (IRA) that’s designed for small-business owners and self-employed workers. An employer must contribute an equal compensation percentage to all eligible employees.
Interest, dividends, and capital gains grow tax-deferred. Withdrawals can be made penalty-free once you reach 59½, and they’re taxed at ordinary income rates.
SEP IRAs also enjoy high contribution limits. The limit is the lesser or 25% of an employee’s compensation or $69,000 for 2024 (up from $66,000 for 2023). However, there are no catch-up contributions for older workers.
SEP IRAs do require account holders to take minimum distributions at age 73; this changes to age 75 in 2033.
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Defined Benefit Plans
Remember the good old days, when people spent their whole career at a company and at the end they got a gold watch and enough guaranteed monthly retirement benefits to live on for the rest of their lives?
Well, if you’re among the 7% of private industry non-union employees who have access to such benefits through such a defined benefit plan, then congratulations!
With a defined benefit plan, what you receive in retirement isn’t based on how well or poorly you invest. This kind of plan offers up a specific monthly benefit once you retire. That benefit might be a straight-up dollar amount, or it might be calculated based on factors such as your salary and/or time with the company.
Employers are responsible for making defined benefit plan payments, even if the investment funds fall short of plan obligations. (In fact, that’s a large reason behind why so many employers have shifted from pensions to defined contribution plans over the past couple of decades.) However, if a defined benefit plan goes underfunded, and your employer’s plan participates in the Pension Benefit Guaranty Corporation (PBGC) program, your benefits might be guaranteed up to a certain point.
There are two primary types of defined benefit plans.
A traditional pension plan sees an employer contribute money to a pension fund. The money in the fund is invested according to the employer’s wishes (and/or the recommendations of the pension provider), and it grows tax-deferred. The growth in that money is meant to support pension payments as employees hit retirement. Pension payments are typically made monthly, similar to a lifetime annuity.
Because pensions are funded with pre-tax income, you won’t owe any tax until you receive payments in retirement. Pension benefits typically start within 60 days after the close of the latest plan year in which the participant turns 65 (or the plan’s normal retirement age, if earlier—pension benefits can begin as early as age 55), finishes 10 years of plan participation, or leaves the employer. Pension payments are taxed as ordinary income.
Cash Balance Plans
A cash balance plan is similar to a traditional pension plan, but with a couple of twists.
Cash balance plans see the employer contribute pre-tax money to a retirement fund. That money is invested and allowed to grow tax-free within the account until it’s withdrawn. The employer guarantees a specific sum at retirement, and it’s on the employer to honor that guarantee regardless of how the investments pan out.
However, rather than all payments from all employees coming from a single pension fund, with a cash balance plan, a fund is created for each employee.
Also, while cash balance pensions can be paid out like traditional pensions—that is, a monthly annuity-like payment—they can also be paid out in a lump sum. Some people choose to take the lump sum and roll it over into an IRA or even another pension. Regardless of how you withdraw from a cash balance plan, however, that money will be taxed as ordinary income.
Retirement Plans Specific to Small Businesses
A couple of retirement plans are designed specifically for small businesses and self-employed individuals, and do not necessarily fall under the umbrellas above.
Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)
A SIMPLE IRA is available to small-business owners with 100 or fewer employees.
SIMPLE IRAs are funded with pre-tax dollars, and investments grow tax-deferred. Employers and employees alike contribute to these plans. Employees can contribute up to $16,000 in 2024 (up from $15,500 in 2023). Meanwhile, employers are required to either:
- Match employee contributions on a dollar-to-dollar basis up to 3% of an employee’s pay (it must match at least 1%, and it must match less than 3% for no more than two out of five years).
- Make nonelective contributions of 2% to all eligible employees. (When calculating the 2%, up to $345,000 in employee compensation is considered for 2024, up from $330,000 in 2023).
SIMPLE IRAs allow catch-up contributions of $3,500 in both 2023 and 2024 for employees age $50 or older.
Money can be withdrawn penalty free at or after age 59½. However, not only do early withdrawals face a 10% penalty—that number rockets to 25% if the withdrawal is made within two years of opening the account.
Employers who offer a SIMPLE IRA can’t maintain any other type of retirement account. Also note that there is no Roth equivalent here.
Related: 8 Best Personal Capital Alternatives
A solo 401(k) is for a business owner with no employees or a single employee who is their spouse.
A solo 401(k) plan operates mostly in the same manner as an ordinary 401(k) plan. It’s funded with pretax money, and your plan will allow you to invest in a limited number of funds. That money grows tax-free, then is taxed as ordinary income once you withdraw it in retirement.
However, with a solo 401(k) plan, self-employed people can contribute to their retirement savings as both an employee and an employer. The employee contribution can be up to 100% of their earned income for the year, but they can’t exceed the annual contribution limit—$23,000 in 2024 (up from $22,500 in 2023). The employer contribution can be up to 25% of their earned income.
Collectively, these contributions can’t exceed $69,000 in 2024 (up from $66,000 in 2023). That is, unless they’re age 50 and older and making catch-up contributions, which for both 2023 and 2024 can amount to up to $7,500. Including catch-up contributions, the maximum aggregate contribution is $76,500 in 2024 (up from $73,500 in 2023).
Also, yes, you can have a Roth solo 401(k) as well, which is funded with after-tax money; but Uncle Sam keeps his hands off that money as it grows and when it’s withdrawn.
Solo 401(k)s and Roth solo 401(k)s have the same early withdrawal penalty guidelines as traditional 401(k)s and Roth 401(k)s, respectively. Required minimum distributions for traditional solo 401(k)s start at age 73, but the age will increase to 75 as of 2033. Roth solo 401(k)s used to have required distributions, too, but that ends starting in 2024.
One specific drawback: If you hire additional employees (besides your spouse), you’ll have to change to a full 401(k) plan and provide benefits to the new employees, or terminate your solo 401(k) and roll your retirement savings over to an IRA or another eligible account.
Individual Retirement Plans—Tax-Advantaged
You can take retirement in your own hands, too. Regardless of your
Individual Retirement Accounts (IRAs)
Individual retirement accounts aren’t employer-sponsored retirement plans. You can open any accounts you qualify for on your own.
A traditional IRA is a tax-deferred retirement account. You can get a tax deduction for your contributions, and then you don’t have to pay taxes on the contributions or earnings until you make withdrawals. Keep in mind that while you’re never barred from contributing, whether contributions are tax-deductible might be limited if you or your spouse is covered by a workplace retirement plan or your income is too high.
A Roth IRA and a traditional IRA share an annual contribution limit, which for 2024 is $7,000 for anyone under age 50 (up from $6,500 in 2023). In both 2024 and 2023, if you’re 50 or older, you can add an additional $1,000 as a catch-up contribution.
With traditional IRAs, you must begin taking required minimum distributions once you reach age 73. That age threshold is set to increase to 75 in 2033.
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A Roth IRA differs from a traditional IRA in that it is funded with post-tax money. The earnings in a Roth IRA grow tax-free, so when you make withdrawals after age 59½, you don’t have to pay taxes on any of the money.
Roth IRA contribution limits are joint for anyone who has both a Roth and traditional IRA. For example, if you contributed $2,000 to your traditional IRA in 2024, the maximum you could contribute to your Roth IRA would be $5,000. You also can’t contribute more than your earned income for the year.
Depending on your income, you might not qualify for a Roth IRA.
For the 2024 tax year, the maximum amount you can contribute to a Roth IRA is gradually reduced to zero if your 2024 modified AGI is:
- $146,000 to $161,000 for single and head-of-household filers ($138,000 to $153,000 for 2023)
- $230,000 to $240,000 for joint filers ($218,000 to $228,000 for 2023)
That also means you can’t contribute to a Roth IRA at all for 2024 if your modified AGI for the year is:
- $161,001 or more if you use the single or head of household filing status on your tax return ($153,001 for 2023)
- $240,001 or more if you’re married and file a joint return ($228,001 for 2023)
If you’re married but file a separate tax return, your annual maximum contribution is gradually reduced to zero if your modified AGI is between $0 and $10,000.
Roth IRA owners are never subject to required minimum distributions. After the account owner’s death, whoever takes over the account has to take distributions.
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Most individual retirement accounts only allow you to contribute during years you earned income. However, a spousal IRA lets each spouse contribute up to the maximum as long as one of them earns an income and the couple file a joint tax return.
This isn’t a separate type of account, but rather, it lets one spouse contribute to a Roth or traditional IRA on the other spouse’s benefit. Spousal IRAs have the same contribution limits and tax benefits as any other traditional or Roth IRA.
The accounts are not co-owned. Each spouse can have accounts under his or her own name.
These might be accounts that were opened before or after the couple were married. It doesn’t matter if the account is opened while both spouses are still working or after one person has stopped working.
A spousal account is an excellent way to ensure a person doesn’t fall behind on retirement savings if they have to take a break from working for any reason.
An IRA rollover lets you transfer funds from a previous employer-sponsored retirement plan, such as a 401(k), into an IRA. This process lets you preserve the tax-deferred status of your retirement savings without triggering any early withdrawal penalties or creating taxable income.
Sometimes, a rollover IRA is your best option as it gives you more overall control over your retirement plans. In other situations, it may make sense to leave the money in your former employer’s plan (if allowed) or roll the money into a 401(k) at your new employer (if available).
They do have a couple of downsides. When you roll your 401(k) into a rollover IRA, you lose the creditor protections that 401(k)s enjoy. Commercial creditors typically can’t touch your 401(k), but your IRA might not be off-limits. Furthermore, if you roll your 401(k) into an IRA, you no longer qualify for the “rule of 55,” which lets workers leave their job and begin taking penalty-free distributions from their employer’s retirement plan after they’ve reached age 55.
Related: The 7 Best Index Funds for Beginners
Health Savings Accounts (HSAs)
A health savings account (HSA) is, as the name would suggest, an account where you save money (on a tax-advantaged basis) that can be used for qualified medical expenses.
But it can be used for more than just medical expenses. If you wait to withdraw funds until age 65 or older, HSAs can also act as a great secondary retirement plan.
HSAs are often said to have “triple tax benefits.” Contributions are tax deductible for self-employed workers or can be funded with pre-tax money if through an employer. Earnings grow tax free. And withdrawals for qualified medical expenses are never subject to tax.
Once you reach age 65, withdrawals can be made for any reason—you only pay income taxes on the money if it’s used for anything other than medical expenses. And HSAs don’t have required minimum distributions.
Contributions are on the low side. For 2024, HSA contribution limits are $4,150 for an individual ($3,850 in 2023) and $8,300 for family coverage ($7,750 in 2023). You also have to have a qualified high-deductible health plan (HDHP) to contribute to an HSA. And should you use your HSA funds for non-medical expenses prior to age 65, you’ll absorb a hefty 20% early withdrawal fee.
Importantly: Most people associate health savings accounts with employer plans because they’re often part and parcel—if you get an HDHP through your workplace, your employer will often also offer (and sometimes even contribute to) an HSA. But that HSA, and the funds within, are yours. If you leave your job, you take the HSA and those funds with you. And you don’t need to have an employer to open an HSA—you just need to be covered under an HDHP.
Related: HSA vs. HRA: How Different Are They?
Individual Retirement Plans—Taxable
We’d be remiss not to mention that there’s one other noteworthy retirement “plan” you can look to that doesn’t come with any tax benefits, but also allows you to contribute an unlimited amount every year.
Taxable Brokerage Account
A taxable brokerage account can be an excellent way to grow your retirement savings. The only requirements for opening one are being an adult and having a Social Security number or employer identification number. Parents can even open a brokerage account for a child, too.
As the term “taxable brokerage account” might suggest, there are no tax advantages to be had here. You fund a brokerage account with after-tax money, and you pay taxes on interest, dividends, and capital gains generated in the account. But because you’ve already paid taxes on the funds and the growth, you don’t pay taxes
However, taxable brokerage accounts are extremely flexible. Account owners can choose exactly which investments they want, and assets are easily bought and sold during open market hours. There’s no contribution limit—you can contribute and invest as much as you want. And you can withdraw your money at any time without facing penalties or paying tax.
What Type of Retirement Savings Plan Is Best?
There is no catch-all best retirement plan. To determine what retirement savings plan is best for you, ask yourself the following:
- Are there any employer-sponsored retirement plans offered through my job?
- Which accounts am I eligible to open?
- Would I prefer a tax deduction now or to lower my tax burden during retirement?
- Which plans have high enough contribution limits for how much I can afford to contribute (or for how much I need to contribute to meet my goal)?
- Do I prefer to choose my own investments or have somebody else choose?
- Do I want to prioritize creating a passive income stream or focus on capital appreciation?
These questions can help you eliminate account options and will start to highlight which plans may be the best fit for you. Finally, the right choice for you may be a combination of multiple retirement plans.
The Best Retirement Plans: FAQs
Why should you save for retirement?
Could you live on $1,700 per month? That’s about what the average monthly Social Security check was in August 2023. And how confident are you that Social Security will still be around and in good shape by the time you retire? The answers to those two questions show why it’s essential to have retirement savings.
Preferably, you save through tax-advantaged retirement plans and have your money in long-term investments that have the potential to grow substantially.
Many people use multiple types of retirement savings accounts to ensure they have enough money to last through retirement.
Can you save in multiple retirement accounts?
Yes, you can have multiple retirement plans. Note that, depending on the accounts you have, you may have overall contribution limits you can’t exceed.
For example, you might have both a Roth and a traditional IRA, which share an annual contribution limit of $7,000 (in 2024) for those under 50. That is the total amount you can stash in them combined per year.
Meanwhile, other retirement plans are completely separate from each other and don’t affect limits. For instance, you might have a Roth IRA and HSA and are able to max out both accounts.
Can you save in a 401(k) and an individual retirement account?
Yes, you can save in both a 401(k) and an individual retirement account as long as you’re eligible for both types of retirement plans. Many people have both accounts and if you can afford to contribute to both, it’s recommended to do so.
Do you need to take required minimum distributions (RMDs) for retirement accounts?
Many, but not all, retirement plans have required minimum distributions once you reach a specified age. The exceptions are any type of Roth retirement plan (meaning a plan funded with post-tax money) and HSAs.