What to Know About Retirement Account Options

There are lots of options out there, but not all of those will make sense for your unique circumstances, or be available to you.

Written by Devon Delfino / August 17, 2022

Quick Bites

  • There are many retirement accounts out there, but availability may depend on your employer.
  • It’s usually a good idea to go with an employer-sponsored plan first, then contribute to an IRA to maximize your retirement savings.
  • You should generally aim to save 12% to 15% of your salary for retirement, but other factors can impact this.

Saving for retirement can feel overwhelming. You have to stay focused, often for decades, and there are so many options to begin with. For those who are just starting to plan for their retirement, knowing what kinds of plans and accounts there are (and which ones are available to you) can help you figure out how to start things off on the right foot.

Here’s what you should know.

Inside this article

  1. Types of retirement plans
  2. Kinds of retirement accounts
  3. Which should you consider?
  4. Which is the best for you?
  5. Can you have multiple accounts?
  6. What’s a good amount of money?

Types of retirement plans

A retirement plan can come in two forms: Defined contribution (meaning you, and possibly your employer, contribute a set amount to your plan, which is then invested on your behalf) and defined benefit (meaning you’d get a set amount paid out in retirement).[1]

Here are some of the options that fall under this umbrella:

Employer-dependent options

PlanHow it worksTax implicationsMain pro(s)Main con(s)
401(k)Get a percentage of your salary automatically deducted from your paycheck each month. That money is then invested, oftentimes in a mutual fund. Contributions reduce your taxable income now, but you pay taxes on withdrawals Employers may match contributions (free money) Investments may be limited, depending on your employer
403(b)Employees contribute a percentage of their salary to these accounts themselves, though employers can also contribute. Contributions reduce your taxable income now, but you pay taxes on withdrawals Flexible contributions Only offered by public schools and certain 501(c)(3) tax-exempt organizations
Traditional pensionsTypically, you qualify for this after working for a company for a given number of years. They contribute money to your pension. You get a source of fixed income in retirement. You’d pay taxes on your pension earnings during retirement You don’t have to contribute; get a guaranteed source of steady income in retirement Not widely available
The Federal Thrift Savings PlanSet aside a portion of your salary to the plan. That money is then invested so it can grow over time, like a 401(k). Contributions reduce your taxable income now, but you pay taxes on withdrawals Matching agency contributions (free money) Only available to federal employees


Self-employed options

Plan Name How it worksWho it's forTax implications
Solo 401(k)Contribute up to 25% of your salary to the plan as an employer Business owners with no common-law employees Contributions can generally be deducted as a business expense
SEP IRAEmployers set aside money for their own retirement, as well as their employees retirement. Contributions are then invested so they can grow. Businesses or any size, including those who are self-employed Employers can deduct contributions from federal income taxes.
SIMPLE IRAEmployees can choose to contribute part of their salary to the plan, and employers must either match those or make nonelective contributions. Small businesses that have no more than 100 employees Both the employer and employee can deduct contributions.

What kinds of retirement accounts are there?

A retirement account is a self-directed option, so it’s open to both traditional employees and self-employed folks. But there can be income limitations to qualify. And, as with any retirement savings vehicle, there are contribution limits.

The primary types of retirement accounts come in the form of IRAs. In this case, that’s traditional and Roth IRAs. Here’s a quick snapshot of how those work [11,12]:

Traditional IRARoth IRA
2022 Annual Contribution Limit$6,000 (or $7,000 if you’re 50 or older)$6,000 (or $7,000 if you’re 50 or older)
2022 Annual Income LimitN/AUp to $143,999
Tax ImplicationsReduce your taxable income now, but pay taxes on the withdrawals in retirement Pay taxes now, take the money out tax-free in retirement

Which should you consider?

First, you should look at the options that are available to you. For those who work for a traditional employer, that may mean starting with the plans presented to you by the company. Self employed folks, or those who otherwise can’t access many retirement plans, can be more limited in their options since they can’t access employer-sponsored options. However, there are still options beyond a traditional or Roth IRA, which have very low contribution limits compared to options like a 401(k)—$6,000 for 2022, if you’re under 50 versus $20,500.[13] For example, solo 401(k)s, SEP and SIMPLE IRAs may be worth considering if you’re in that position.

After you’ve narrowed things down, it’s a matter of figuring out what your retirement goals are and which option best suits those needs.

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Which is the best for you?

Some of the factors you should consider include:

  • Contribution limits

  • How much you’ll need for retirement

  • Your ability to contribute to a retirement plan or account

  • Plan costs (like management and other administrative fees)

  • Tax implications of available accounts or plans

“Usually, the best retirement savings option for Americans is their employer-sponsored retirement,” says Kristina Keck, vice president at Woodruff Sawyer. “It could be a 401k plan if it’s a for-profit company, or a 403b plan for a non-profit. The second best option would be to open a Roth IRA.”

There are a few reasons for this: High contribution limits, lower plan costs for the employee, and advisor oversight. “Most 401k plans have institutional advisors managing the plan, so they’re monitoring the investments in the plan. You may not have that same kind of management in an IRA,” she adds.

Can you have multiple retirement accounts?

Yes. In fact, it can be a good idea to have more than one kind of retirement account so that you can maximize your contributions. For example, if you have a 401(k), you may also qualify to contribute to an IRA—and those contributions wouldn’t count toward your max 401(k) contributions for the year.

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However, you should know that if you have an employer-sponsored plan as well as a traditional IRA, you may not be able to deduct all of that money from your taxes. And you may not qualify for a Roth IRA, depending on your income.[14]

What’s a good amount of money?

The amount you’ll need will depend on many factors, like:

  • Your lifestyle

  • Age

  • Health

  • Life expectancy

  • Dependents

  • Inflation trends

  • Other financial goals

“Most advisors recommend that you contribute 12% to 15% of your salary to your retirement account,” says Keck, noting that most Americans only contribute about 7% of their salary to a retirement account, and that gap can feel like a big leap. That said, there are things you can do to traverse the gap: “Increase your contribution every time you get a raise, and if you can, set up an automatic increase of, say, 1% or 2%...If you keep increasing your contribution every year by 2%, you’ll be well set up for a successful retirement,” she says.

Article Sources
  1. “Types of Retirement Plans.” U.S. Department of Labor. https://www.dol.gov/general/topic/retirement/typesofplans.
  2. “401(k) Plans.” Internal Revenue Service. Feb. 18, 2022. https://www.irs.gov/retirement-plans/401k-plans.
  3. “IRC 403(b) Tax-Sheltered Annuity Plans.” Internal Revenue Service. Feb. 18, 2022. https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans.
  4. “What is a Pension?” Pension Benefit Guarantee Corporation. Feb. 26, 2021. https://www.pbgc.gov/about/who-we-are/retirement-matters/post/2013/04/17/What-is-a-Pension.
  5. “The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers.” Social Security Office of Retirement and Disability Policy. https://www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html.
  6. “Taxation of Retirement Income.” FINRA.org. https://www.finra.org/investors/learn-to-invest/types-investments/retirement/managing-retirement-income/taxation-retirement-income.
  7. “Retirement Services: MY ANNUITY AND BENEFITS.” OPM.gov. https://www.opm.gov/retirement-services/my-annuity-and-benefits/thrift-savings-plan/.
  8. “SMALL BUSINESS RETIREMENT: Individual 401(k).” Vanguard. https://investor.vanguard.com/accounts-plans/small-business-retirement-plans/individual-solo-401k.
  9. “Simplified Employee Pension Plan (SEP).” Internal Revenue Service. Jan. 3, 2022. https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep.
  10. “SIMPLE IRA Plan FAQs.” Internal Revenue Service. Jan. 3, 2022. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans.
  11. “Traditional and Roth IRAs.” Internal Revenue Service. Nov. 5, 2021. https://www.irs.gov/retirement-plans/traditional-and-roth-iras.
  12. “IRA FAQs: Rules.” Fidelity. https://www.fidelity.com/retirement-ira/ira-rules-faq.
  13. “IRS announces changes to retirement plans for 2022.” Internal Revenue Service. Nov. 17, 2021. https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022.
  14. “Retirement Topics - IRA Contribution Limits.” Internal Revenue Service. Nov. 27, 2021. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.

About the Author

Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

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