Learn about different types of retirement accounts, including IRAs, 401(k)s, and more. Compare features so you can choose the best savings plan for your future with Vanguard.
Retirement account types: Choosing the right plan for you
A retirement account is a specialized savings vehicle designed to help you save for your post-working years. Retirement accounts come in different forms, each with distinct features and benefits, ranging from tax-advantaged growth and employer contributions to flexible investment options and higher contribution limits. It's important to understand how they work, so you can choose the options that best fit your financial goals.
Taking a strategic approach can help you navigate your choices more effectively. Some key areas to consider include:
- Tax benefits today. When you contribute pre-tax dollars to a retirement account like a 401(k), your taxable income for that paycheck decreases. This means the IRS calculates your income tax on a smaller amount, so you pay less tax now. As a result, your take-home pay goes down, but not by the full amount you contributed.
- Contribution limits. The amount you're allowed to contribute each year varies significantly among different types of retirement accounts. For example, 401(k) plans allow higher annual contributions that can substantially boost your retirement savings and reduce your taxable income, while IRAs have lower limits that may require you to explore additional strategies to meet your retirement goals.
- Taxes owed in retirement. While deferring taxes is beneficial, it's also important to consider how much you'll owe when you start withdrawing funds in retirement. Some accounts are structured to provide tax-free withdrawals, which can help you manage your retirement income more efficiently.
In this article, we'll delve into the most common types of retirement accounts, including employer-sponsored plans and IRAs, to help you understand their unique features and benefits. Whether you're looking to maximize contributions, take advantage of tax benefits now, or minimize taxes in retirement, we'll guide you through the process so you can confidently choose the options that best align with your financial goals and circumstances.
Discover which account type is right for you
Different types of retirement accounts
Retirement accounts can be differentiated by a few key factors: whether you can open an account directly as an individual, when your contributions are taxed, and the limits on how much you can contribute each year.
Account access and eligibility
Employer-sponsored retirement accounts, such as 401(k) and 403(b) plans, are set up by employers and allow employees to contribute directly from their paychecks. These accounts often come with matching contributions from the employer, which can significantly boost your savings.
Individual retirement accounts (IRAs) are set up and managed by individual investors. IRAs give you more control over your investment choices and can provide tax benefits, either through tax-deferred growth (with a traditional IRA) or tax-free withdrawals in retirement (with a Roth IRA). While employer-sponsored accounts typically have higher contribution limits and features like automatic payroll deductions, IRAs offer flexibility and can be a valuable supplement for those looking to maximize their retirement savings.
Timing of taxes
Pre-tax contributions are deducted from your income before taxes are withheld, reducing your taxable income for the year and potentially lowering your current tax bill. When you make pre-tax contributions, any withdrawals you make in retirement are taxed as ordinary income. Contributions to traditional IRAs can often be tax-deductible (pre-tax), depending on factors such as your income, tax filing status, and whether you or your spouse are covered by an employer-sponsored retirement plan. At higher incomes, deductibility is phased out.
Post-tax contributions, on the other hand, are made with after-tax money, so you don't receive an immediate tax break. However, your withdrawals in retirement are generally tax-free1, which can be advantageous if you expect to be in a higher tax bracket later in life. Both Roth IRAs and Roth 401(k) accounts are funded with after-tax dollars.
Common employer-sponsored plans
Employer-sponsored retirement accounts, often called workplace retirement plans, are unique because they're directly tied to your job. These accounts, such as 401(k) plans, offer several advantages, including higher contribution limits and the potential for employer-matching contributions. If your employer doesn't offer a workplace retirement plan, you won't be eligible to participate in this type of account.
An employer match is a valuable feature where your employer adds a certain amount to your retirement account based on how much you contribute, often up to a specific percentage of your salary. This is essentially free money that can significantly boost your retirement savings over time. For example, if your employer matches 50% of your contributions up to 6% of your salary, contributing 6% means you effectively save 9% of your salary each year. There are also other ways employers contribute to your retirement plan, aside from matching. While not all employers offer these plans, they are quite common, especially in larger companies.
One downside to consider is that employer-sponsored plans typically have more limited investment options compared to IRAs, which can offer a broader range of choices. It's worth checking with your human resources department to find out which type of retirement account your employer offers, so you can understand the specifics and take full advantage of any available benefits.
Traditional 401(k)
A traditional 401(k) plan allows employees to contribute a portion of their wages toward retirement savings through payroll deductions. Participants contribute to the plan with pre-tax money and pay taxes upon withdrawal in retirement. Making contributions to a traditional 401(k) reduces your taxable income, giving you an instant tax advantage.
Many (though not all) employers offer to match employees' contributions up to a certain percentage. If your employer does this, make sure you contribute enough to get the full match to take advantage of the free money they're offering you.
401(k) plans can be used alongside other retirement account types and offer significantly higher contribution limits compared to IRAs. For 2026, employees can contribute up to $24,500 (or $32,500 if you're 50 or older) to a 401(k), which is much higher than the IRA limit of $7,500 (or $8,600 if you're 50 or older). The higher limit allows you to save more money for retirement and potentially grow your savings faster. The limit doesn't include any employer contributions to your 401(k).
When an employer contributes to your 401(k) account, you gain ownership of those contributions through a process called "vesting" and employer plans can have different “vesting schedules”. This is important because if you leave your job before becoming fully vested, you may forfeit a portion of your employer's contributions. For example, you might own 20% of your employer's contributions after 2 years, 40% after 3 years, and 100% after 6 years. It’s important to review your employer’s plan information. Any direct contributions you make as an employee are always 100% vested, meaning they're yours to keep regardless of your employment status.
If you leave your employer, you have the option to keep the money in your existing 401(k) account, roll it over into a new 401(k) with a new employer, or roll it over into an IRA. This flexibility ensures that your retirement savings continue to remain invested even if you change jobs.
You also have the option to withdraw the balance of your account as a lump sum, but you would be subject to income taxes and possibly an early withdrawal penalty if you're under 55 when you leave your employer. If you withdraw some or all of your funds, you can still decide to roll it over to a new employer’s plan or to an IRA within 60 days to avoid taxes and penalties.
Roth 401(k)
A Roth 401(k) is a workplace retirement plan where you make after-tax contributions. This means you pay taxes on the money you contribute now, but withdrawals in retirement, including earnings, are tax- and penalty-free (after a 5-year holding period and once you reach age 59½). Unlike Roth IRAs, Roth 401(k) plans don't have income limits, making them accessible to high earners. They also have the same higher contribution limits as a traditional 401(k).
Roth 401(k) plans are growing in popularity but are still less common than traditional 401(k) plans. They're ideal for early-career professionals who are in lower tax brackets and expect to have a higher income in retirement, or for anyone looking to minimize future tax liabilities. If you leave your employer, you can roll over the money to a Roth IRA or a new employer's Roth 401(k) plan without incurring additional taxes or penalties.
403(b) and 457(b) plans
A 403(b) plan is similar to a 401(k) but is specifically for employees of public schools, certain nonprofits, and other tax-exempt organizations. Like a 401(k), it allows employees to contribute a portion of their salary to the plan, with similar tax advantages such as employer match, higher contribution limits, and tax savings.
A 457(b) plan is a type of retirement account available to state and local government employees, as well as some nonprofit workers. It also allows pre-tax contributions.
It's worth noting that some employers may offer both a 403(b) and a 457(b) plan, in addition to a 401(k). This dual or triple option gives employees greater flexibility to maximize their retirement savings by taking advantage of the tax benefits. While you can contribute to all these accounts, be aware that 401(k) and 403(b) plans share a combined employee deferral limit. This means you can split your contributions between them, but you can't exceed the total limit in a given year.
Some employers also offer Roth options in 403(b) and 457(b) plans. These accounts work similarly to Roth 401(k) plans, allowing you to contribute after-tax dollars, which can grow tax-free and be withdrawn tax-free in retirement.1
Pensions (defined benefit plans)
A pension plan provides a fixed, preestablished benefit for employees at retirement, based on factors such as their previous salaries and their tenure at the company. With a pension plan, the employer is responsible for managing the investments and assuming the investment risk, ensuring there are enough funds to provide the promised benefits.
Pension plans have specific rules regarding eligibility, contributions, and withdrawals, all designed to help plan participants save for retirement.
Pensions are becoming increasingly uncommon and are typically only offered by government organizations or unions.
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IRAs
IRAs are widely accessible retirement savings vehicles available to anyone with earned income. Unlike 401(k) or 403(b) plans, which are offered through employers, IRAs can be opened independently at various financial institutions, including banks, life insurance companies, mutual fund companies, and brokerage firms. There are 2 main types of IRAs, traditional and Roth, each offering different tax advantages.
Investors can have multiple IRAs, including both traditional and Roth, but there's an annual contribution limit that applies across all IRAs.
Key advantages of IRAs include their flexibility and a wide range of investment options. This allows you to tailor your investments to your risk tolerance and financial goals, giving you more control over your retirement savings strategy.
Traditional IRA
A traditional IRA is a type of retirement savings account that allows you to contribute money before it is taxed, which can lower your current taxable income, giving you a tax break now. However, the deductibility of your contributions may be limited based on your income and whether you or your spouse participate in an employer-sponsored retirement plan. With a few simple inputs, you can calculate your annual IRA contribution limits.
Other features and benefits of a traditional IRA include:
- Tax-deferred growth. Any growth on the money in your IRA is tax-deferred, meaning you don’t pay taxes on the earnings until you withdraw the funds.
- Investment flexibility. Traditional IRAs offer a wide range of investment options, including stocks, bonds, mutual funds, and more, allowing you to build a diversified portfolio.
- Complementary to 401(k) plans. You can have both a traditional IRA and a 401(k) or other employer-sponsored retirement plan, giving you more ways to save for retirement.
With a traditional IRA, you can make penalty-free withdrawals starting at age 59½. Your withdrawals are treated as ordinary income and are subject to income tax in the year they're withdrawn. Generally, withdrawals taken before you’re 59 ½ are subject to a 10% penalty. There are certain exceptions to the age 59½ rule, including first-time home purchases or education expenses.
Once you reach age 73, you'll need to start taking required minimum distributions (RMDs) from your traditional IRA. These distributions ensure that you begin withdrawing the money you've saved, and they're subject to income tax. Starting in 2033, the RMD age will increase to 75.
Explore traditional IRAs at Vanguard
Roth IRA
A Roth IRA is also designed to help you save for retirement, but it differs from a traditional IRA in how contributions and withdrawals are taxed. With a Roth IRA, contributions are made with after-tax dollars, so they don't reduce your current taxable income. However, any earnings in a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free, making these accounts particularly attractive for those who expect to be in a higher tax bracket during retirement. To be considered qualified, withdrawals must occur after you turn 59½ and the account must have been open for at least 5 years (this is known as the 5-year rule).
Unlike a traditional IRA, there are income limits for contributing directly to a Roth IRA. If your income exceeds these limits, you can still fund a Roth IRA using a strategy known as a "backdoor" IRA conversion.
You can invest in both a Roth IRA and a traditional IRA, as well as a 401(k) or other employer-sponsored retirement plan. This allows you to diversify your retirement savings strategy and take advantage of different tax benefits. Just keep in mind that the 2026 contribution limit of $7,500 (or $8,600 if you're 50 or over) applies across all your IRAs.
Unlike traditional IRAs, Roth IRAs don't require you to take RMDs during your lifetime. This means you can let your assets remain invested with tax-free grow potential for as long as you want, providing more flexibility and potentially increasing your retirement savings.
You can also convert a traditional IRA to a Roth IRA if that aligns with your strategy.
Other types of retirement accounts
Specialized retirement accounts, like the ones described below, offer unique benefits tailored to specific situations and eligibility criteria. Each of these retirement account types is designed to help different types of investors save more effectively for their financial future.
SEP and SIMPLE IRAs
SEP-IRAs (Simplified Employee Pension) and SIMPLE IRAs (Savings Incentive Match Plan for Employees) are distinct from traditional and Roth IRAs because they have specific eligibility requirements tailored to freelancers, solo entrepreneurs, and business owners.
In some ways, these accounts function like 401(k) plans, since they both allow for employer contributions and offer tax-deferred growth. As with a 401(k), employees have control over how their funds are invested. SEP-IRAs allow only employer contributions and have high limits, making them ideal for small businesses and those who are self-employed.
SIMPLE IRAs permit both employer and employee contributions with moderate limits and are suitable for small businesses with fewer than 100 employees.
If you're eligible, you can set up a SEP-IRA for yourself and your employees, no matter how many people work for you. You can have your own IRA as well as a SEP-IRA. A unique feature of the SEP-IRA is that employer contributions don't affect an individual's annual IRA contribution limits, allowing for additional tax-advantaged savings.
Spousal IRAs
A spousal IRA is a retirement savings account designed for nonworking or lower-earning spouses. It allows the higher earner to contribute to an IRA on behalf of their spouse, helping both partners save for retirement. This account can be either a traditional or Roth IRA, but it's not a joint account; each spouse maintains their own separate IRA.
To qualify for a spousal IRA, the couple must be married and file a joint tax return. The earned income from the higher earner is used to fund their spouse's IRA, and the contribution limits are the same as those for individual IRAs. This allows both spouses to benefit from tax-advantaged retirement savings, even if one of them has no or low personal earned income.
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Minor IRAs
Also referred to as a custodial IRA, a minor IRA is a retirement savings account set up for a child under the age of 18 (or 21 in some states). To open and contribute to a minor IRA, the minor must have earned income, such as from a part-time job, babysitting, or lawn mowing. The account can be either a traditional IRA or a Roth IRA.
The custodian, typically a parent or legal guardian, manages the IRA funds until the minor reaches adulthood (age 18 or 21, depending on state laws). During this time, the custodian can make investment decisions, but only the minor's earned income can be used for contributions. Once the minor becomes an adult, the account is transferred into a standard traditional or Roth IRA, giving the young adult control over their retirement savings.
Health savings account (HSA)
An HSA is a tax-advantaged savings account for individuals with high-deductible health plans (HDHPs) to save for medical expenses. With an HSA, your contributions are tax-deductible, and any earnings grow tax-free. Depending on your HSA provider, you may be able to invest the funds in different options such as mutual funds, similar to an IRA.
Withdrawals from an HSA for medical-related expenses are always tax-free, but the money can be withdrawn for other purposes once you turn 65. Any money withdrawn for nonmedical reasons after age 65 will be taxed as ordinary income.
Though not a retirement account, HSAs are often favored for long-term savings because of their triple tax advantage. Some employers will even contribute to your HSA account, and there are no RMDs with an HSA.
To qualify, you must be enrolled in an HDHP. Funds can be used for a range of qualified medical expenses, such as deductibles and copayments. Unused funds roll over year to year, allowing you to build a substantial balance over time.
What type of retirement account should I open?
The goal of retirement savings is to ensure you have enough money to live comfortably and enjoy your golden years without financial stress. Different retirement accounts serve this goal in various ways, each with its own advantages.
Key considerations
- Eligibility. Check if your employer offers a retirement savings plan, and if they provide matching contributions. Traditional and Roth IRAs are available to most investors, but income limits apply to Roth IRAs.
- Anticipated retirement tax bracket. If you expect to be in a lower tax bracket in retirement, a traditional IRA or 401(k) might be better. If you expect to be in a higher tax bracket, a Roth IRA or Roth 401(k) could be more advantageous.
- Years to retirement. Consider if the contribution limits for each account—including catch-up contributions if you qualify based on your age—are sufficient to meet your retirement savings goals. You may want to open other accounts to expand your contribution options.
Rather than choosing between a 401(k) and an IRA, a sound retirement strategy often involves using multiple account types to create different "buckets" of retirement income. This diversification can help manage taxes and ensure you have a steady stream of income.
Once you've contributed enough to receive the full match from your employer, a savvy next step is to "max out" your IRA to take full advantage of tax benefits and compound growth. After maximizing your IRA, it's beneficial to return to contributing to your employer plan until you reach these limits, thereby optimizing your retirement savings and tax advantages.
Don't feel pressured to pick the "best" option right away. You can always make changes later through conversions, rollovers, or recharacterizations. The important thing is to start saving and investing for your future.
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Frequently asked questions about retirement accounts
If you're under 50, you can contribute up to $24,500 to a 401(k) and $7,500 to an IRA for 2026. Investors over 50 can take advantage of catch-up contributions, which are $8,000 for a 401(k) and $1,100 for an IRA in 2026. These limits may increase slightly each year.
You can start taking penalty-free withdrawals from a 401(k) or traditional IRA at age 59½. With a Roth IRA, you can withdraw contributions at any time without penalty, but earnings must remain in the account until you reach age 59½ and the account has been open for at least 5 years to avoid taxes and penalties. For HSAs, you can withdraw for nonmedical expenses at age 65, but you'll pay taxes on those withdrawals.
Withdrawals from a 401(k) or traditional IRA before age 59½ usually come with a 10% penalty and are taxed as ordinary income. There are some exceptions, such as for first-time homebuyers or education expenses.
RMDs are mandatory withdrawals from traditional IRAs and 401(k)s that start at age 73. They ensure you don't defer taxes indefinitely.
Catch-up contributions allow investors ages 50 and older to contribute extra to multiple types of accounts as they save for retirement. For 2026, workers can direct up to $24,500 into a 401(k) plan, and investors ages 50 and older can make an extra $8,000 in catch-up contributions. A new "super catch-up" contribution, raises the catch-up limit to $12,000 for workers ages 60 to 63, but only some 401(k) plans offer this option. Investors ages 50 and older can contribute an additional $1,100 to a traditional or a Roth IRA for 2026. For HSA accounts, individuals ages 55 and older can contribute an additional $1,000 in catch-up contributions.