Through various employer-sponsored and individual retirement plans, individuals can save for their retirement while benefitting from tax breaks and other incentives. From 401(k)s to individual retirement accounts (IRAs) to retirement plans for business owners, we compiled a list of the various retirement accounts to examine where each shines in helping individuals save for life after work.
Retirement plans differ across organizations, so the plan you have available to you depends on your employer. For instance, while the 401(k) may be the most well-known, it’s primarily for employees of for-profit companies. Public schools use a similarly structured plan called 403(b) plans. Meanwhile, state and local government employees have access to 457(b) accounts.
Here’s how the different employer-sponsored retirement plans stack up
Who it’s for
Eligibility
Advantages
Disadvantages
401(k) plans
Employees of for-profit companies
Determined by each employer, but an employee must be allowed to participate if they’re age 21 and have at least one year of service(1)
Automatic contributions through salary deferrals
Employers may match contributions
Pre-tax
Tax-deferred growth
Tax-deductible contributions
Roth
Tax-free growth
Tax-free qualified withdrawals
Limited investment options
10% penalty on withdrawals before age 59.5
Pre-tax
Required minimum distributions (RMDs) starting at age 73
Pay taxes on withdrawals in retirement
Roth
No immediate tax break
Must wait 5 after first deposit to avoid withdrawal penalties
Must wait until age 59.5 to withdraw contributions and earnings without penalties
403(b) plans
Employees of public schools, 501(c)(3) tax-exempt organizations and churches(2)
Be an employee of a public school, church or eligibile tax-exempt organization
Employers may exclude employees who work less than 20 hours per week or who participate in another 403(b), 457(b) or 401(k) plan
Same as a 401(k)
Same as a 401(k)
457(b) plans
Employees of state and local governments or a 501(c) tax-exempt organization(3)
Be an employee of a state or local government or of an eligible tax-exempt organization
An employer is not required to offer a 457(b) plan to all its employees(4)
Same as a 401(k)
Same as a 401(k)
Thrift Savings Plan
Federal employees and members of the uniformed services
Be a federal employee, a member of the uniformed services or a civilian in certain other categories of government service
Same as a 401(k)
Same as a 401(k)
Cash-balance plan
Employees of for-profit companies as an alternative to defined contribution pension plans
Be at least age 21 and have completed a year of service; however, employers can select less restrictive requirements
Specific retirement benefit not dependent on employee contributions
Balance can be paid out as an annuity or lump sum; lump sum distribution can be rolled over into an IRA(6)
Tax-deferred growth
Contributions reduce taxable income
Business must have a reliable cash flow to contribute to each employee’s account
Nonqualified deferred compensation plans
Corporate executives or highly compensated employees
The employer must write out specifics such as amount to be paid, payment schedule and a life event that will result in payment (example retirement, death, etc.)
Pay no federal or state income tax on deferred money in the year you defer it(5)
No contribution limits
No loans available
Can’t roll the money over into an IRA or other retirement account
Deferred compensation remains in the employer’s general assets and is subject to creditors’ claims if the company goes bankrupt
Defined contributions plans
Defined contribution plans are retirement plans in which the employee, employer or both contribute to the employee’s retirement account. Contributions are invested, and the employee receives a balance that may fluctuate over time based on the contributions and investment gains and losses.
The following are examples of defined contribution plans:
401(k) A 401(k) is an employer-sponsored plan offered by for-profit companies in which eligible employees contribute a portion of their salary. The account can be structured as either pre-tax or post-tax, but investment options are usually limited to mutual funds. In 2024, you can contribute up to $23,000 to your 401(k). If you’re 50 and older, you can contribute up to an additional $7,500. An employer may or may not offer matching contributions.
403(b) A 403(b) plan is a similar retirement account to the 401(k) but is offered to employees of public schools, churches and tax-exempt 501(c)(3) tax-exempt organizations. Like a 401(k), you can contribute up to $23,000 in 2024 and an additional $7,500 if you’re 50 and older. Depending on your employer, you may also have access to matching contributions.
457(b) A 457(b) is a retirement plan like the 401(k) that’s offered to state and local government employees, as well as employees of 501(c) tax-exempt organizations. Like a 401(k) and 403(b), your funds grow tax-deferred until you withdraw your money. 457(b) plans also have a contribution limit of up to $23,000, including any employer contributions.
Thrift Savings Plan Thrift Savings Plans (TSPs) are retirement plans for federal employees and members of the uniformed services, such as the Army, Navy and the National Oceanic and Atmospheric Administration, among others. The annual contribution limit to a TSP is $23,000, with a catch-up contribution of $7,500 if you’re age 50 and older.
Defined benefit plans
A defined benefit plan is one that promises a specific monthly payment in retirement. The promised benefit may be based on your salary and length of service.
Cash-balance plans A cash balance plan is a defined benefit plan that defines the promised benefit in terms of a stated account balance.
Other types of employer-offered retirement plans
Nonqualified deferred compensation plans (NQDC) Nonqualified deferred compensation plans are an agreement between an employee and employer to defer a percentage of the employee’s income until a later date in retirement. These NQDC plans are usually offered to highly compensated employees. These plans may come with their own stipulations, such as limiting employees from offering consulting services in a niche similar to their employer after retiring.
Best individual retirement plans
All individuals with earned income can contribute to an IRA in addition to any workplace retirement plans. The following are different types of individual retirement plans.
Who it’s for
Eligibility
Advantages
Disadvantages
Traditional IRAs
Individuals who want to fund retirement savings with tax-deductible contributions and defer paying taxes until retirement
Anyone with earned income
No age limit
Tax-deferred growth
Tax-deductible contributions
Flexible investment options
Relatively low contribution limits
RMDs starting at age 73
Roth IRAs
Individuals who want tax-free growth and tax-free withdrawals in retirement
Anyone with earned income but with a modified adjusted gross income (MAGI) below a certain amount
Tax-free growth
Tax-free withdrawals in retirement
No RMDs
Relatively low contribution limits
Contributions are not tax-deductible
Must wait five years from your first Roth IRA contribution to withdraw money without incurring a 10% early-withdrawal penalty
Spousal IRAs
Married individuals with a spouse who isn’t working
Married couple must file joint tax returns and one must have taxable compensation
The total combined contributions can’t be more than the taxable compensation reported on the joint return
Allows a spouse who doesn’t work contribute to an IRA
Same benefits as a traditional or Roth IRA
Same disadvantages as a traditional or Roth IRA
Rollover IRAs
Individuals switching jobs or retiring
Need an old employer-sponsored plan
Same benefits as a traditional or Roth IRA
Same disadvantages as a traditional or Roth IRA
Traditional IRAs
A traditional IRA is a pre-tax retirement account that allows you to grow funds tax deferred until you begin taking withdrawals in retirement. For 2024, the maximum you can contribute to an IRA is $7,000. RMDs begin at age 73.
Roth IRAs
A Roth IRA is a post-tax retirement account that allows you to pay taxes upfront and enjoy tax-free growth and tax-free withdrawals in retirement.
Unlike a traditional IRA, you won’t have to take RMDs with a Roth IRA. However, income limits apply to Roth IRAs. If you’re a single tax filer, you can’t contribute to a Roth IRA if you make more than $161,000 in 2024. If you’re a married couple, you can’t make more than $240,000.
Spousal IRAs
A spousal IRA allows an out-of-work spouse to contribute to an IRA if their spouse has taxable income. Both spouses must file taxes together, and the total combined contributions can’t be more than the taxable compensation reported on the joint return. Spousal IRAs come in both traditional and Roth forms.
Rollover IRAs
A rollover IRA lets you move funds from an old employer-sponsored retirement account to an IRA tax- and penalty-free while preserving the tax-deferred status of your assets. A rollover IRA can be either a traditional or Roth IRA. However, to roll over pre-tax funds to a Roth IRA, you will need to pay taxes on any untaxed amount.
Best retirement plans for self-employed or small business owners
Small business owners or self-employed individuals have the following options when it comes to available retirement plans.
Who it’s for
Eligibility
Advantages
Disadvantages
Solo 401(k) plans
Business owners with no employees
Must have no employees
Same as a standard 401(k)
Same as a standard 401(k)
SEP IRAs
Businesses of any size
Be any size business
Flexible investment options
Same tax benefits as a traditional IRA
Funded only by the employer
RMDs at age 73
SIMPLE IRAs
Small business owners
Must have fewer than 100 employees
Employer and employee contribute
Same tax benefits as a traditional IRA
RMDs at age 73
Only available to small business with 100 or fewer employees
Solo 401(k)
A solo 401(k) plan is a traditional 401(k) plan designed for business owners with no employees. The business owner can contribute as both employer and employee. In 2024, you can contribute up to $69,000 to this plan and, if you’re 50 and older, an additional $7,500.
SEP IRA
A SEP IRA is available to any business owner regardless of company size and lets employers contribute to a traditional IRA set up for the employee. Business owners may contribute up to 25% of each eligible employee’s income but no more than $69,000 per person for 2024.
SIMPLE IRA
A SIMPLE IRA is available to small business owners with 100 or fewer employees and lets employees and employers contribute to traditional IRAs set up for employees. Employers are required to contribute matching a contribution of up to 3% of an employee’s compensation or a 2% nonelective contribution for each eligible employee. For 2024, employees can contribute up to $16,000 to a SIMPLE IRA account.
Bottom line
The best retirement plan for you ultimately depends on your employment situation and what plan is available to you. However, you have full control over your ability to open and fund an IRA. Review the best IRAs and best Roth IRAs to see which provider is right for you.
Frequently asked questions
What is the best form of retirement plan?
The best retirement plan is the retirement plan that’s available to you. Every plan has advantages and disadvantages, but the most important thing is to start saving early and regularly.
What is the $ 1,000-a-month rule for retirement?
The $1,000-a-month rule states that for every $1,000 per month you want to withdraw in retirement, you need at least $240,000 saved.
Is a Roth IRA better than a 401(k)?
A Roth IRA isn’t necessarily better than a 401(k). The best retirement account depends on your goals and circumstances.
Matt Miczulski is an investments editor at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
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