Saving for retirement is arguably the single most important financial endeavor most of us undertake. It takes initiative, planning and consistent saving and investing to create a nest egg to cover a retirement that could stretch two or more decades. No matter where you work or how much you earn, it’s important to start saving as early as possible to take maximum advantage of compounding, which can harness the power of time to increase the value of your money.

Already retired? Learn more about managing retirement income.

There are numerous types of retirement plans and, over the course of your working life, you might find yourself accumulating savings in a number of accounts. For instance, you might start with a job that doesn’t offer a retirement plan and contribute on your own through an individual retirement arrangement (IRA). Later, you might find yourself working for an employer that offers a 401(k) plan. And perhaps later still, you might become self-employed and put money into a Simplified Employee Pension (SEP) using a SEP IRA.

Retirement plans vary considerably in terms of the investments offered, the amount you can contribute and other factors. That said, most retirement plans share some similar features.

Tax Advantages. Retirement plans tend to give participants tax benefits that non-retirement accounts don't offer, such as reducing your current taxable income in any given tax year, allowing for tax-deferred or tax-exempt growth, or some combination.

Control. Unlike pension plans, which are increasingly rare, you control how much you contribute to your employer-sponsored retirement account or IRA and, given the choices available to you through an employer plan, where to direct your contributions.

Fees. Retirement plans and IRAs come with a variety of fees that, like the fees and commissions of other financial products, have an impact on the overall performance of your retirement account assets.

Contribution Limits. The IRS sets annual contribution limits for retirement plans. Limits are increased periodically due to inflation, though not every year. In some 457 plans and the Thrift Savings Plan (TSP), there are a few circumstances when you can contribute above the annual limits. In addition, the maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your income.

Catch-Up Contributions. Participants age 50 or over at the end of the calendar year can, if permitted by a plan, make catch-up elective deferral contributions beyond the basic contribution limits. For more information, visit the IRS’s Catch-Up Contributions page.

Matching Contributions. Although not required to do so, many employer plans offer matching contributions—in other words, a dollar for every dollar you save, up to a preset limit (which might be a dollar threshold or a percentage). IRS rules might require that matched funds reside in a pre-tax account, depending on the type of account you have. Under certain types of plans, your employer might also make matching contributions based on your repayment of qualified student loans used to fund your personal higher education expenses.

Automatic Features. A growing number of plans offer one or more automatic features that require no action from the participant. An increasingly common feature is automatic enrollment, where employees are enrolled at a preset contribution rate and are also automatically enrolled into a preselected investment fund. The default investment will likely be a lifecycle fund, a balanced fund or a managed account, which the federal government has approved as acceptable choices.

Because individual needs vary, consult with a tax specialist and/or financial professional to discuss your personal needs.

Who Regulates Retirement Plans?

If your employer both offers and contributes to an employee retirement plan (for example, by matching a portion of your contributions), then you’re part of a plan that follows rules laid down in the Employee Retirement Income Security Act (ERISA). All ERISA plans are regulated by the Department of Labor (DOL).

ERISA requires plans to provide participants with plan information including plan features and how the plan is funded. ERISA plans also provide fiduciary responsibilities for those who manage and control plan assets and give participants avenues to pursue grievances, including the right to sue for benefits. Most plans offered by private sector employers are ERISA plans.

If your employer offers a retirement plan but doesn’t make contributions, it’s a “non-ERISA plan” and regulated by the IRS. Many, but not all, 403(b) plans fall into this category. IRAs are also regulated by the IRS.

401(k) and Other Employer-Sponsored Plans

Employer-sponsored retirement plans are just that: retirement plans offered by an employer to help its employees save for retirement. Plans are named for the section of the tax code where they’re described. Most are salary-deferral plans, meaning a plan in which the employee designates a portion of their salary to be deducted and put into the retirement plan.

Participating in an employer-sponsored plan gives you a head start on your long-term financial security. Employer-sponsored plans not only provide a mechanism for saving but also allow the money in your account to compound tax-deferred. That means that the earlier you begin to participate and the more you contribute, the greater chance you’ll have of amassing a substantial retirement nest egg.

Most employer-sponsored plans provide at least three investment options, but some plans offer dozens of options. Plans generally offer a combination of mutual funds, guaranteed investment contracts (GICs) or stable value funds, company stock and variable annuities. Some plans offer brokerage accounts, which means you can select investments from the full range of stocks, bonds, mutual funds and other types of assets offered by the brokerage rather than having to choose among set plan alternatives.

• 401(k) Plans: 401(k) plans are a type of salary-deferral plan set up by a private-sector employer. Salary-deferral plans are generally self-directed. This means you’re responsible for deciding how to invest the money that accumulates in your account. Usually you must choose among a list of investments offered by the plan. The advantage of self-direction is that you can select investments that you believe will help you achieve your long-term goals. But, of course, this also means you have added responsibility for choosing wisely.
  
  Your employer may also contribute to your account, most commonly through a match of some portion of the amount you contribute.
  
  Each 401(k) plan has a sponsor, usually your employer. The sponsor decides which factors determine your eligibility, what percentage of your salary you can contribute to your plan, whether to match your contributions and which investments will be available within your plan. The plan administrator keeps track of the company’s 401(k), handling management details and making sure that the plan runs smoothly. Your sponsor also chooses your plan provider, typically a financial services company that offers investment products, plan administration and recordkeeping services.
  
  When you enroll in a 401(k) plan, you authorize your employer to withhold a certain percentage, or a specific dollar amount, of your gross pay each pay period and put it into an account that’s been set up in your name.
  
  As a rule, your employer must deposit your contributions into your account within 15 business days after the end of the month in which the money is deducted from your pay. Those deposits should show up on your 401(k) statements. Employers have more leeway, though, in adding any matching contributions they make to your account. In fact, the match may be made as infrequently as once a year.
  
  You can raise or lower your contribution rate as often as your employer allows. That may be just once during the year, or it may be more often. For example, if you receive a raise, you might decide that you can afford to put away more toward retirement and boost the percentage you’re contributing from 6 percent of your pay to 8 or 10 percent.
   
• Other Employer-Sponsored Plans: In addition to 401(k) plans, there are a number of other employer-sponsored plans similarly designed to help employees achieve financial security in retirement. Here are the most common ones and who they generally cover:
  • 457(b): employees of state or local governments or a tax-exempt organization under IRC Section 501(c);
  • 403(b): employees who work for a public educational institution or a tax-exempt organization under IRC Section 501(c)(3);
  • TSP: employees of the federal government, including members of the military; and
  • SIMPLEs and SEPs: employees of small businesses.

Beginning in January 2025, employers will be required to automatically enroll employees in an offered 401(k) or 403(b) plan upon becoming eligible; employees may opt out. (Small and new businesses, as well as church and governmental plans, will be exempt from this new requirement. In addition, all current 401(k) and 403(b) plans—i.e., those effective for plan years beginning prior to January 2025—are eligible for exemption.)

Employer plans may give their employees the option of putting money into a traditional 401(k) or Roth 401(k) account. IRS rules allow employers to offer a Roth 401(k) option only if they already offer a traditional plan. If an employer offers both, it’s common to be able to split your annual contribution between a traditional and Roth 401(k) —though your total contribution can’t be more than the annual limit Congress sets for an employer-sponsored plan. Once you’ve made contributions, you can’t move money between the two accounts.

The chart below describes each option.

IRAs

IRAs provide a flexible way to set aside money for your retirement. You can put money into your IRA every year you're eligible, even if you’re also enrolled in another kind of retirement savings plan through your employer. If both you and your spouse earn income, each of you can contribute to your own IRA up to the annual limit.

Not everyone can deduct money they put into an IRA. Whether and how much you can deduct depends on how much you earn and whether or not you have a retirement plan at work. The amount you can deduct begins to decrease—and ultimately phases out—when your modified adjusted gross income (AGI) reaches IRS thresholds.

There’s an exception to the earned income requirement for nonearning spouses, called a spousal IRA. This type of IRA also has contribution limits (see the Kay Bailey Hutchison Spousal IRA limit information in IRS Publication 590).

In some cases, you can make contributions to an IRA through your employer by taking advantage of a deemed or "sidecar" IRA provision. According to the IRS, a qualified employer plan can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions.

If you’re interested in investing your IRA dollars in alternative investment such as real estate or private placements, there’s another choice—self-directed IRAs.

Like employer-sponsored retirement plans, there are traditional and Roth IRAs. Both offer potential tax advantages.

Managing a retirement account takes some work. Your plan administrator generally handles your portfolio's actual transactions and the recordkeeping and reporting, but you decide when and how to reallocate and rebalance your assets.

Beyond keeping tabs on the performance of your portfolio, you’ll want to know your plan’s rules and procedures and how much your plan and its investments are costing you. Take time to read your summary plan description, a document that lays out the rules, fees and procedures of your plan. You might want to review the document with a financial adviser or ask your plan administrator or human resources department about any details you’d like clarified or explained in more detail.

Fees and Expenses

Employer plans such as 401(k)s carry asset-based fees and expenses that have a direct impact on your investment return and your long-term financial security. It can be hard to calculate how much these fees cost because you don’t pay them directly by writing a check. Rather, they’re subtracted before your return is reported. Your account statement documents the amount of money you actually paid for various services and investment expenses, and most fees are also explained in your summary plan description. You can also ask your human resources or personnel department for an explanation.

Monitoring Performance

Although your fees cover the administrative services needed to manage your employer-sponsored plan, it’s up to you to keep track of how your investments are doing.

One strategy to consider is spreading out your IRA contributions over the year on a regular schedule. This is called dollar-cost averaging, a strategy that can help you incrementally meet your yearly savings maximums without regard to market ups and downs.

Learn more about different ways to measure performance and how benchmarks such as key stock or bond indexes can serve as helpful reference points for assessing how well your portfolio is doing. Also, keep in mind that you might need to rebalance your portfolio from time to time. The investment allocation you started with (say 60 percent stocks and 40 percent bonds) will change, sometimes dramatically, and making adjustments over time will help you reach your financial goals.

Your account statements are a valuable resource for managing your retirement plan and keeping tabs on how your investments are performing. Your employer must give you an account statement at least once every quarter, but many plan providers send you statements on a monthly basis.

Early Withdrawals

Retirement plan policy discourages taking out money early. You generally cannot make withdrawals before age 59½ without paying an early withdrawal penalty. The penalty is 10 percent of the amount you withdraw.

There are exceptions, however, if withdrawals are used to meet certain emergency personal or medical expenses, purchase your first home or pay college tuition bills or for certain other reasons listed in the federal tax laws.

In any event, before you make any early withdrawals, check with your tax or legal adviser to be sure you're following the rules. Even if you don’t face a penalty, you’ll likely have to pay income tax on any withdrawal you make.

Hardship Withdrawals

You might be able to withdraw from your employer-sponsored retirement account to meet the needs of a financial emergency. The IRS provides information about circumstances that may qualify as a hardship withdrawal, including:

• out-of-pocket medical expenses;
• down payment or repairs on a primary home;
• college tuition and related educational expenses; and
• threat of mortgage foreclosure or eviction.

It’s up to your employer to determine the specific criteria of a hardship withdrawal. For instance, one plan may consider a medical expense to be a hardship but not payment of college tuition. And keep in mind, hardship distributions permanently reduce your account balance. In addition, you’ll have to pay taxes on the amount you withdraw, plus a 10 percent penalty if you’re under age 59½.

Required Withdrawals

Just as laws and regulations generally discourage you from taking your money out too early, there are rules that govern when you must start withdrawing retirement assets. In 2023, Congress increased the age for taking required minimum distributions (RMDs) to 73 for people who turn 72 years old on or after January 1, 2023, and 73 years old on or before December 31, 2032. (Additional changes will go into effect in 2033.)

Your RMD is the minimum amount you must withdraw from your account each year. You can withdraw more than the minimum required amount, and withdrawals will be included in your taxable income, except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

Where to Look for Information and Advice

You're not alone when it comes to managing your employer-sponsored plan. You'll want to anticipate future returns as accurately as possible—and you might need the help of outside resources to do so. Here are a few places where you can look for information and advice.

• Your Employer and Plan Administrator. Many provide educational material and seminars about retirement planning and saving. Some also provide access to investment advice for retirement online or through a financial professional at little or no cost to you.
• Investment Professionals. You also might want to consult a tax adviser and/or an investment professional. Ask any potential registered representative or adviser about their background, how they earned their credentials and an explanation of their fees. Most importantly, check their backgrounds. FINRA BrokerCheck tracks the credentials of registered representatives and investment adviser representatives. The Securities and Exchange Commission’s (SEC’s) Investment Adviser Public Disclosure website also allows you to search for information about investment adviser firms registered with the SEC or state regulators.

If a Problem Occurs

If you believe there’s a problem with your retirement plan, contact your plan administrator or employer first. If you're not satisfied with their response, there are a number of places to turn for help, including the following:

Employee Benefits Security Administration. The DOL’s Employee Benefits Security Administration (EBSA) is the agency charged with enforcing the rules governing the conduct of plan managers, investment of plan money, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law and workers’ benefit rights. Call EBSA toll-free at 1-866-444-3272 or contact your regional EBSA office for help.

FINRA. If a problem involves a brokerage firm serving as the 401(k) fund administrator or a registered financial professional who provided advice or handled transactions, you have the option of filing a complaint with FINRA. Use FINRA BrokerCheck to research whether a brokerage firm or its representatives are FINRA members, and take a look at their professional backgrounds and disciplinary histories.

During the span of employment, it’s not uncommon for two situations to arise with respect to retirement savings: the potential need to borrow from your retirement account, and a change in employer that raises the question of whether to roll your assets into a new plan or an IRA.

Loans

If you need cash, you might be tempted to borrow from your employer-sponsored plan rather than applying to a bank or other lender. While not all plans permit loans, many do. And with most plans, you repay your loan through payroll deductions, so you're unlikely to fall behind as long as you remain employed.

Loan terms may vary from one plan to the next, so be sure to read the plan information or speak to your employer plan administrator. That said, when you borrow from your employer plan, you generally sign a loan agreement that spells out the principal, the term of the loan, the interest rate, any fees and other terms that may apply. You might have to wait for the loan to be approved, though in most cases you’ll qualify. After all, you’re borrowing your own money.

The IRS sets limits on the maximum amount you can borrow. You must also pay market interest rates, which means the rate must be comparable to what a conventional lender would charge on a similar-sized personal loan.

Normally, the term of a loan is five years. That’s the longest repayment period the government allows—though you might be able to arrange a shorter time. The only exception occurs if you’re using the money to buy a primary residence. In that case, some plans allow you to borrow for 25 years.

If you’re married, your plan might require your spouse to agree in writing to a loan because they might have the right to a portion of your retirement assets if you divorce. If you borrow, change jobs and don’t repay, that money might be gone, and your spouse’s share might be affected.

When you borrow from your account, the money usually comes out of your account balance. In many plans, the money is taken in equal portions from each of the different investments. So, for example, if you have money in four mutual funds, 25 percent of the loan total comes from each of the funds.

Here are some pluses and minuses of borrowing from your retirement account.

Caution: If you leave your job while you have an outstanding loan balance, you’ll probably have to repay the entire balance within 90 days of your departure. If you don’t pay, you’ll be in default, and the remaining loan balance will be considered a withdrawal. Income taxes will be due on the full amount. And if you’re younger than 59½, you might owe the 10 percent early withdrawal penalty as well. Should this happen, you could find your retirement savings substantially drained.

Rollovers

Whether you're starting a new job or getting ready to retire, you'll have to make a decision about what to do with money in your employer-sponsored plan. You might be able to leave the account where it is, or you can move—or roll over—some or all of your savings into another account. It’s important to understand some key aspects of rollovers.

Chances are, you’ll change jobs several times over the course of your career. Fortunately, employer plans are portable. If you switch jobs before retirement, you’re generally able to take one of these options:

• leave the money in your former employer’s plan;
• roll over the money to your new employer’s plan, if the plan accepts transfers;
• roll over the money into an IRA; or
• take the cash value of your account.

In the first three scenarios, you won’t lose the contributions you’ve made, your employer’s contributions if you’re vested, or earnings you’ve accumulated in your old 401(k). And your money will maintain its tax-deferred status until you withdraw it. You have time to consider your options and complete transactions: By law, you must be given at least 30 days to decide what to do with money in your employer plan when you switch jobs.

The last option on the list—cashing out your account—is a simple but costly one. You can ask your plan administrator for a check, but your employer will withhold 20 percent of your account balance to prepay the tax you’ll owe. Plus, the IRS will consider your payout an early distribution, meaning you could owe the 10 percent early withdrawal penalty on top of combined federal, state and local taxes. That could total more than 50 percent of your account value.

For additional information on rollovers, see the IRS’s Rollovers of Retirement Plan and IRA Distributions.

• FINRA:
  • Save-the-Max Calculator
  • Required Minimum Distribution Calculator
  • Annual Contribution Limits
  • Investor Insights: 5 Tips for Automatic Retirement Plan Investing
  • Investor Insights: The Beginner’s Guide to 401(k)s
• Department of Labor:
  • A Look at 401(k) Fees
  • What You Should Know About Your Retirement Plan
• IRS:
  • Retirement Plans
• SEC:
  • Employment to Retirement
  • Pension Plans