Types of Retirement Plans: Which Is Right for You?

Contribution details: Employees define the amount they want to contribute from their paycheck (hence the name "defined contribution"). Sometimes employers may also contribute. Annual contribution limits are $23,000 for 2024 ($22,500 for 2023). If permitted by your plan, catch-up contributions of an additional $7,500 may be allowed for individuals who are 50 and older in 2023 and 2024. Visit IRS.gov for more information.

RMDs: Each of these plans are subject to required minimum distributions ("RMDs") rules. Visit the IRS website for details.

Withdrawal rules: While 401(k)s and 403(b)s may hit you with a 10% penalty for withdrawing your money early (before age 59 ½), there generally is no penalty for early withdrawals from a 457(b). Keep in mind that you may also have to pay income tax on early withdrawals. For more information, see IRS Topic No. 558.

What we like: Employer match. Some employers may offer matching contributions, which means for every dollar you contribute up to a certain point, your employer will also contribute some amount.

What we don’t like: Limited options in plan choice since plans are offered by your employer. Employer contributions may be subject to a vesting period (that is, you have to work for the company for a certain amount of time before you can receive this matching benefit).

Good for: Individuals who want a low-maintenance way to grow their retirement savings. Bonus points if you work at a company that offers an employer match.

Defined benefit plans

These plans, commonly referred to as pension plans, provide a fixed, pre-determined benefit for employees when they retire.

With these plans, the amount of money you’ll receive in retirement (considered a benefit) might be a fixed amount or based on a formula defined by the employer (hence the name “defined benefit”). Typically, the formula includes factors like an employee’s tenure and salary history.

Contribution details: Generally the employer makes most of the contributions, though employees may be required or allowed to contribute. Typically, employers will define the investments in the plan.

Withdrawal rules: These are set by your employer.

What we like: Since benefits are either fixed or based on a formula, you know what sort of income to expect in retirement.

What we don’t like: Pensions are a dying breed. Generally, you also have to be willing to stick with the same company for a while if you want to make the most out of this benefit.

Good for: Individuals who work at a company that offers this benefit, and plan on staying with that company until they retire.

Individual Retirement Accounts (IRAs)

As you can probably guess by the name, these plans are set up by individuals.

Like other retirement plans, IRAs can be made up of an array of financial products, including stocks, bonds and mutual funds that are reserved for retirement.

A big draw for IRAs? Even if you already have a retirement plan set up through your workplace, you may still be able to open an IRA.

Traditional IRA

When you contribute to a Traditional IRA, your money grows tax-deferred until withdrawn in retirement. Depending on your circumstances, your contributions may be tax deductible, which effectively lowers your taxable income. As always, it's a good idea to consult a tax professional if you have questions.

Contribution details: Individuals contribute. Contribution limits are $6,500 for 2023 and $7,000 for 2024 Catch-up contributions of an additional $1,000 may be allowed for those 50 and older.

RMDs: Traditional IRAs are subject to RMD rules. Visit the IRS website for more information.

Withdrawal rules: If you withdraw your money before age 59 ½, you may be subject to tax and a 10% penalty.

What we like: More choice and control in investment types. While your options for 401(k) plans are typically limited to what your employer offers, you can shop for many options when choosing an IRA.

What we don’t like: Lower contribution limits than 401(k)s.

Good for: Individuals who don’t have a 401(k) offered through work and/or would prefer more flexibility in choosing a retirement plan.

Roth IRA

With a Roth IRA, you pay taxes on your contributions, but your withdrawals in retirement are tax-free as long as certain conditions are met. This may be attractive if you expect your tax rate to be higher in retirement than it is today.

Contribution details: Individuals contribute. Annual contribution limits are the same as a Traditional IRA. Keep in mind that if you have both a Traditional and Roth IRA, the total contributions you make each year to all of your IRAs cannot exceed the annual contribution limit. See IRS's "IRA Contribution Limits" for more information.

Withdrawal rules: You can withdraw your contributions at any time, without incurring taxes or penalties. However, earnings on your contributions may be subject to tax and a 10% penalty if you withdraw your money early (before 59 ½). (Learn more: What Are the Penalites for Withdrawing Early From an IRA?).

What we like: Not having to pay taxes on withdrawals in retirement.

What we don’t like: There are income limits. If you make a certain amount – either as an individual or married couple – you will not be eligible to contribute to a Roth IRA, or your contribution amount may be reduced. See IRS's "Roth IRA Contribution Limit."

Good for: Individuals who think they might be subject to a higher tax rate in retirement and/or want to supplement an existing taxable retirement account, such as a 401(k).

Retirement plans for small businesses and self-employed individuals

If you’re self-employed or own your business, chances are you make a lot of important decisions. And setting up a retirement plan – either for yourself and/or for your employees – is no exception.

This can often be really challenging, but a lot comes down to making sure you have the right plan for your business.

SEP IRA

A Simplified Employee Pension IRA is a retirement account that offers tax advantages for business owners and the self-employed.

And it actually is simple. As the business owner, you can shop for a SEP IRA from various financial institutions and pick the details of your plan. Contributions are tax-deductible and the money grows tax-deferred until retirement.

Contribution details: Contribution limit is $66,000 for 2023 and $69,000 for 2024 or 25% of compensation, whichever is less. If you contribute to a SEP IRA for yourself and your employees, you must contribute to everyone’s account equally (based on a percentage of salary). You can’t pay yourself a greater percentage, and you can’t play favorites.

RMDs: SEP IRAs are subject to required minimum distribution rules (for more details, see IRS Retirement Topics: RMDs).

Withdrawal rules: If you withdraw your money before age 59 ½, you may be subject to income tax and a 10% penalty.

What we like: Employees may combine these with a Traditional or Roth IRA. Read up on the IRS rules for more details here. 

What we don’t like: Catch-up contributions aren’t allowed for those 50 and older. There’s also no Roth version of a SEP IRA, which means there’s no option to pay taxes now and withdraw your money tax-free in retirement.

Good for: Individuals who are self-employed or own a small business with few or no employees.

SIMPLE IRA

The alphabet soup of all retirement plans, SIMPLE stands for Savings Incentive Match Plan for Employees. SIMPLE IRAs allow employees in companies with 100 or fewer employees to contribute to a Traditional IRA, and employers must contribute. In this way, it’s similar to companies that offer matching 401(k)s.

The difference is in the details of employer matching. With SIMPLE IRAs, employers are required to either: match every contribution an employee makes to their plan, up to 3% of the salary, or contribute a flat 2% of the employee’s salary, regardless of whether the employee chooses to contribute.

Contribution details: Employers must contribute, employees can contribute. Contribution limits for employees are $15,500 in 2023 and $16,000 in 2024. In 2023 and 2024, catch-up contributions of an additional $3,500 may be allowed for those 50 and older. See IRS's "SIMPLE IRA Plan" for more information.

RMDs: SIMPLE IRAs are subject to required minimum distribution rules (for more details, see IRS Retirement Topics: RMDs).

Withdrawal rules: Generally, you pay tax on any withdrawals from your SIMPLE IRA, but you may be subject to an additional 10% tax if you withdraw before age 59 ½. Additionally, that amount can jump to 25% if you haven’t held the account for at least two years. Visit the IRS's website here for more details on SIMPLE IRAs.

What we like: Employers are required to contribute.

What we don’t like: Lower contribution limits than 401(k)s.

Good for: Smaller companies generally with fewer than 100 employees.