Retirement Accounts
Establishing a retirement account is an important part of financial planning. Future retirees can no longer rely on Social Security or pension payments to meet all their income needs. Choosing the right retirement account depends on many factors, including your age, employment and tax bracket.
- Written by Rachel Christian
Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.
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Matt Mauney
Matt Mauney
Financial Editor
Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for ChicagoTribune.com, LATimes.com, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.
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Ebony J. Howard, CPA
Ebony J. Howard, CPA
Credentialed Tax Expert at Intuit
Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation. She specializes in analyzing financial information in the health care, banking and real estate sectors.
Read More- Published: May 11, 2020
- Updated: December 20, 2024
- 8 min read time
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What Are the Best Retirement Accounts?
An increasing number of Americans use retirement accounts to fund their post-work years.
These accounts allow you to set aside money and invest it — usually into stocks, bonds and mutual funds. The money grows throughout your working career.
Your employer may offer a retirement plan, or you can open your own at a financial institution such as a bank or brokerage firm.
There are several types of retirement accounts, and each offers favorable federal tax treatment to encourage people to save early and often.
Retirement accounts can either be tax-deferred or tax-exempt.
Traditional 401(k) plans and Individual Retirement Accounts, or IRAs, are tax-deferred. Tax savings are realized in the year you make contributions.
In contrast, Roth IRAs and Roth 401(k) plans are tax-exempt, which means withdrawals are tax-free in retirement.
What Account May Be Best for You?
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Individual Retirement Accounts
An Individual Retirement Account, or IRA, is an investment account set up at a financial institution. The two main types of IRAs are Roth and traditional.
The yearly maximum contribution to an IRA is $7,000 in 2025, with an additional $1,000 catch-up limit if you’re 50 years or older.
Traditional IRA
With a traditional IRA, contributions are generally tax-deductible in the year they are made. This can help lower your income tax burden each year.
However, you will pay taxes when you withdraw the money in retirement.
If you withdraw money before turning 59.5 years old, the IRS imposes a 10% penalty. There are exceptions to this penalty if you meet certain criteria or spend the money on specific purchases, such as buying a home.
- Anyone can contribute to a traditional IRA, regardless of your yearly salary.
- Contributions are tax deductible the year they are made.
- Wide selection of investments to choose from.
- Early withdrawals before age 59.5 are subject to a 10% penalty from the IRS.
- Income tax is owed on any withdrawals after age 59.5.
- You must begin taking required minimum distributions by age 72.
Roth IRA
Unlike its traditional counterpart, contributions to a Roth IRA do not count toward lowering your annual burden at tax time.
Because you don’t receive a tax break on Roth IRA contributions, you won’t be taxed again when you withdraw money during retirement.
Roth IRAs also offer greater flexibility to access money before age 59.5 than traditional IRAs.
If the money you withdraw comes from your contributions and not from gains, interest or dividends, you avoid government penalties and taxes.
If you’re a high-income earner, you may not qualify for a Roth IRA. The IRS sets limits on how much money you can make and still contribute to this type of retirement account.
- Tax-free withdrawals during retirement.
- No required minimum distributions.
- Wide selection of investments to choose from.
- Contributions are not tax deductible the year they are made.
- Not everyone qualifies for a Roth IRA — the income phase-out range for taxpayers is $150,000 to $165,000 for singles and heads of household in 2025.
SEP IRA
A Simplified Employee Pension Individual Retirement Account, or SEP IRA, is a type of traditional IRA that gives entrepreneurs, self-employed people and small business owners a way to save for retirement.
With a SEP, employer contributions are made directly to traditional IRAs for the business owner and each eligible employee.
The business owner is responsible for making contributions, but workers still own and maintain their own investment portfolios.
High contribution limits are a unique feature of SEP IRAs.
In 2025, employers can make annual contributions of up to $70,000 or 25% of each employee’s compensation, whichever is less, according to the Internal Revenue Service.
For example, if your employee earns $40,000 a year, you can contribute up to $10,000 to his or her SEP IRA annually.
Self-employed people can contribute up to 25% of their net self-employment earnings to their own account.
Nondeductible IRA
A nondeductible IRA is funded with after-tax dollars and offers no immediate tax benefit. You cannot deduct contributions on your tax return.
If you have access to a workplace retirement plan and have a modified adjusted gross income higher than $83,000 in 2023 as a single filer — or more than $136,000 as a married filer — you cannot deduct contributions to a traditional IRA. So, a nondeductible IRA is most common for high-income earners.
Nondeductible contributions come with their own eligibility rules and contribution limits that must be followed.
Spousal IRA
Usually, nonworking people are ineligible to open an IRA because they don’t earn income.
However, married, nonworking people whose spouse is employed can open a spousal IRA — as long as the couple meets certain requirements.
This way, the working spouse can make contributions to an IRA for the nonworking spouse.
It’s important to note that each spouse’s IRA is separate. IRAs cannot be held jointly.
SIMPLE IRA
A SIMPLE IRA plan stands for Savings Incentive Match Plan for Employees, and it is eligible to most small businesses with 100 or fewer workers.
Establishing a SIMPLE IRA requires minimal paperwork for the employer and maintenance costs are low.
Employees can contribute a maximum of $16,000 annually to a SIMPLE IRA in 2025. Employees ages 50 and older can contribute up to $19,500.
A SIMPLE IRA plan follows the same investment, distribution and rollover rules as traditional IRAs.
Self-Directed IRA
Self-directed IRAs offer a wider range of investment options than other accounts.
Instead of limiting your choices to stocks, bonds and mutual funds, self-directed IRAs let you invest in alternative assets such as real estate, livestock, gold, silver, mineral rights and more.
You do not manage a self-directed IRA entirely on your own. You need to appoint a custodian or trustee to administer the account.
However, these accounts can be very complex and risky. They are only recommended for experienced investors.
In 2025, you can contribute up to $7,000 a year to a self-directed IRA, and another $1,000 catch-up contribution if you’re 50 or older.
401(k) Plans and Other Employee-Sponsored Accounts
While you can open a Roth or traditional IRA outside of work, you can only access a traditional or Roth 401(k) if it’s offered by an employer.
Both traditional and Roth 401(k)s feature tax advantages, either now or in the future.
In a traditional 401(k) plan, a portion of your pre-tax paycheck funds the account.
You select the investments — usually mutual funds — and the money grows tax deferred until you withdraw it in retirement.
Some employers even offer to match your contributions, up to a certain percentage.
For example, your job may offer a 100% match up to 3% of your salary. If you make $40,000, and contribute $1,200 annually to your 401(k) plan, your workplace in this scenario will also kick in $1,200 a year.
This is essentially free money for your future.
Roth 401(k)s are similar in many ways but with one key difference.
The amount you contribute to a Roth 401(k) doesn’t reduce your annual income tax burden the way a traditional plan does. However, you won’t pay taxes on money you withdraw from a Roth account during retirement.
Contribution limits are much higher for 401(k) plans than IRAs.
In 2025, you can contribute up to $23,500 a year to a 401(k), along with an additional $7,500 catch-up contribution a year if you’re 50 years or older.
403(b) Plan
A 403(b) plan is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations.
The features of these plans are comparable to those found in a 401(k). Both feature the same basic contribution limits and offer Roth options.
457(b) Plan
A 457(b) plan is a tax-advantaged employee retirement plan only offered by state and local public employers. Some nonprofit employers may also be eligible to participate.
It is one of the least common defined-contribution retirement plans. These plans are very similar to 401(k) plans. However, there are a few key differences.
- An early IRS withdrawal penalty is not assessed on participants who take money out before age 59.5.
- The contribution catch-up limit provision for people over age 50 is doubled.
- Independent contractors can participate.
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- Member of the Association for Financial Counseling & Planning Education
- Certified educator in personal finance
- Former member of the American Finance Association
15 Cited Research Articles
- Internal Revenue Service. (2022, December 21). Retirement Topics - IRA Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
- Internal Revenue Service. (2022, December 8). 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500. Retrieved from https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
- Internal Revenue Service. (2022, October 26). Retirement Topics - SIMPLE IRA Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits
- Internal Revenue Service. (2022, October 26). SEP Contribution Limits (including grandfathered SARSEPs). Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps
- Internal Revenue Service. (2020, January 15). SIMPLE IRA Plans. Retrieved from https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan
- Internal Revenue Service. (2020, January 15). Traditional IRAs. Retrieved from https://www.irs.gov/retirement-plans/traditional-iras
- Internal Revenue Service. (2020, January 10). Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/roth-iras
- Internal Revenue Service. (2020). IRC 457(b) Deferred Compensation Plans. Retrieved from https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans
- Internal Revenue Service. (2020). Retirement Plans FAQs regarding 403(b) Tax-Sheltered Annuity Plans. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-403b-tax-sheltered-annuity-plans
- Internal Revenue Service. (2019, December 11). SEP Plan FAQs – Contributions. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
- Hartman, R. (2019, May 15). A Guide to Self-Directed IRAs. Retrieved from https://money.usnews.com/money/retirement/iras/articles/a-guide-to-self-directed-iras
- CNN Money. (n.d.). How do deductible and nondeductible IRAs differ? Retrieved from https://money.cnn.com/retirement/guide/IRA_traditional.moneymag/index2.htm
- Financial Industry Regulatory Authority. (n.d.). Traditional and Roth 401(k)s. Retrieved from https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/traditional-and-roth-401ks
- U.S. Securities and Exchange Commission. (n.d.). Self-directed Plans - Individual Retirement Accounts (IRAs). Retrieved from https://www.investor.gov/additional-resources/retirement-toolkit/self-directed-plans-individual-retirement-accounts-iras
- U.S. Securities and Exchange Commission. (n.d.). Traditional and Roth 401(k) Plans. Retrieved from https://www.investor.gov/additional-resources/retirement-toolkit/employer-sponsored-plans/traditional-and-roth-401k-plans
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