Types of Retirement Plans: Which Is Right for You?

Contributions: Employees define the amount they want to contribute from their paycheck (hence the name "defined contribution"). Sometimes employers may also contribute. Defined contribution plans are subject to annual contribution limits. The standard maximum annual contribution limits are $23,000 for 2024 and $23,500 for 2025. If permitted by your plan, catch-up contributions of an additional $7,500 may be allowed for individuals who are 50 or older in 2024 and 2025. Visit IRS.gov for more information on catch-up contributions.

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.

Pros: Potential employer match – some employers may offer to match your contributions up to a certain amount each year. Talk to your employer’s benefits department to get the details, so that you can try to get the full match each year.

Cons: May have limited options in plan choice since plans are offered by your employer. Many employers also require you to stay with the company for a set number of years before the employer contributions become fully vested.

2. 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.

Contributions: 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 typically set by your employer.

Pros: Since benefits are either fixed or based on a formula, you know what level of income to expect in retirement.

Cons: Pensions are not as common these days. 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.

Individual Retirement Accounts (IRAs)

IRAs are retirement accounts set up by individuals. Traditional and Roth IRAs are two popular options. Unlike a 401(k) plan, an IRA is not tied to your workplace.

Traditional IRA

Generally, contributions to a Traditional IRA are made with pre-tax dollars, and your money is allowed to grow tax-deferred in the account until you withdraw funds in retirement. 

Contributions: Individuals contribute. Contributions are subject to annual limits set by the IRS. For 2024 and 2025, the maximum standard annual contribution limit for an IRA is $7,000. If you’re 50 or older, you can make an additional catch-up contribution of up to $1,000. This means you could make a total contribution of up to $8,000 ($7,000 + $1,000).

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

Withdrawal rules: Withdrawals prior to the age of 59½ are generally subject to income tax and a 10% early withdrawal penalty unless you qualify for an exception. After the age of 59½, withdrawals are subject to income tax, but there’s no early withdrawal penalty. Visit IRS.gov for more information on early withdrawal rules. 

Pros: More investment options. 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.

Cons: Lower contribution limits than 401(k)s.

2. Roth IRA

Contributions to a Roth IRA are made with after-tax dollars, and your withdrawals in retirement are tax-free once certain conditions are met.

Contributions: Individuals contribute; however, you may not be eligible to contribute if your annual income exceeds a certain threshold (visit IRS.gov for more details). 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: Contributions can be withdrawn tax-free and penalty-free at any time. Withdrawals of earnings prior to the age of 59 ½ (or before the account is 5 years old) are generally subject to income tax unless it’s a qualified distribution and to a 10% early withdrawal penalty unless you qualify for an exception.

Pros: Tax-free withdrawals in retirement once certain conditions are met.

Cons: Contributions are not tax-deductible, and not everyone can contribute to a Roth IRA due to income limits.

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 challenging, but a lot comes down to making sure you have the right plan for your business. Here are some potential options.

1. SEP IRA

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

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

Good to know: SEP IRAs follow the same investment, distribution, and rollover rules as Traditional IRAs. 

Contributions: Employers contribute. 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). For 2025, the annual maximum contribution limit is $70,000 ($69,000 for 2024) or 25% of compensation, whichever is less.

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

Withdrawal rules: A SEP IRA follows the same distribution rules as a Traditional IRA. Generally, if you withdraw your money before age 59 ½, you may be subject to income tax and a 10% penalty.

Pros: Provides business owners (and the self-employed) with a flexible method to contribute toward their employees' retirement as well as their own retirement savings.

Cons: Generally, catch-up contributions aren’t allowed.

2. SIMPLE IRA

SIMPLE stands for Savings Incentive Match Plan for Employees. SIMPLE IRAs allow employers and employees to contribute to Traditional IRAs set up for employees. Generally, it's a good option for small businesses with 100 or fewer employees. 

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

Contributions: Employers must contribute, employees can contribute. For 2025, the standard annual contribution limit for individuals is $16,500 ($16,000 in 2024). Catch-up contributions of an additional $3,500 may be allowed for participants 50 or older.

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

Withdrawal rules: Per the IRS, generally, you have to pay income tax on any amount you withdraw from your SIMPLE IRA. You may also have to pay an additional tax of 10% or 25% on the amount you withdraw unless you are at least age 59½ or you qualify for another exception. Visit the IRS webpage on withdrawals from SIMPLE IRAs for more information. 

Pros: Employers are required to contribute. Contributions to SIMPLE IRA accounts are always 100% vested, or owned, by the employee.

Cons: Lower contribution limits than other retirement plans.