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Saving for retirement is one of the most important financial endeavors many 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-free growth, or some combination.
Control. Unlike pension plans, which have become less common, you control how much you contribute to your employer-sponsored retirement account or IRA (within federally defined contribution limits) 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 and accounts, 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. The limit varies depending on the type of plan; certain exceptions and income levels may affect these limits. Visit the IRS Contributions page for more information.
Catch-Up Contributions. If permitted by a plan, participants age 50 or over may be eligible to make catch-up contributions beyond basic limits, with some plans offering higher limits for those aged 60 – 63. For more information, visit the IRS’s Catch-Up Contributions page.
Matching Contributions. Many employer plans offer matching contributions up to a preset limit, and some might also make matching contributions based on your repayment of qualified student loans. Consult your plan documents for details about matching contributions available to you.
Automatic Features. Many plans offer automatic enrollment and default investment options that require no action from the participant. Employer-sponsored 401(k) and 403(b) plans that were established after December 29, 2022, must automatically enroll eligible employees; you can choose to opt out.
Check with your employer about the specifics for your plan, and consult with a tax specialist and/or financial professional to discuss your personal needs.
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 U.S. Department of Labor (DOL).
ERISA requires plans to provide participants with plan information such as plan features and avenues to pursue grievances. Further information about these features can be found at the DOL website.
If your employer offers a retirement plan but doesn’t make contributions, it might be a “non-ERISA plan” that’s regulated by the U.S. Department of the Treasury and the IRS. Many, but not all, 403(b) plans fall into this category. IRAs are also regulated by Treasury and the IRS.
Employer-sponsored retirement plans are just that: retirement plans offered by an employer to help its employees save for retirement. 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, typically allowing 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 building a substantial retirement nest egg.
Most employer-sponsored plans provide multiple investment options to choose from, generally including a combination of asset classes. Some plans offer self-directed brokerage accounts, also known as brokerage windows, which allow you to select investments from the full range of stocks, bonds, mutual funds and other types of assets offered by the brokerage firm 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. They’re generally self-directed, which means you’re responsible for deciding how to invest the money that accumulates in your account, typically by choosing from 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 range of your salary you can contribute (up to IRS annual limits), whether to match your contributions and which investments will be available within your plan. The plan administrator—often your employer—is responsible for overseeing the plan and ensuring that it operates in compliance with the law. Your sponsor also chooses a plan provider, typically a financial services company that handles investment products, recordkeeping and day-to-day administrative 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. For example, if you receive a raise, you might decide that you can afford to boost the percentage you’re contributing.
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, you might 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 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.
| Traditional 401(k) | Roth 401(k) | |
|---|---|---|
| Eligibility | In general, an employee must be allowed to participate if they’ve reached age 21 and have at least one year of service. The employer can decide to offer eligibility earlier, including immediately. | Same as traditional |
| Contributions | Employee contributions come from pre-tax income, reducing gross income reported to IRS. Employer matches are also pre-tax dollars. | Employee contributions come from post-tax income so don’t reduce gross income reported to IRS. Employer matches can be treated either as pre-tax dollars or as direct contributions to employees’ Roth 401(k)s, depending on how the plan is set up. Consult your employer for details about your plan. |
| Withdrawals | Contributions (your own and any matches) and earnings are taxed at your ordinary income tax rate upon withdrawal. Withdrawals are subject to a 10% tax penalty if made before you reach age 59½, with limited exceptions as defined by the IRS. Traditional 401(k)s are subject to required minimum distributions. | Your own contributions and earnings aren’t taxed provided that you make a “qualified distribution,” which the IRS defines as follows:
Employer matches that are made as pre-tax dollars are treated like a traditional 401(k) for tax purposes. However, if your employer makes matching contributions directly to your Roth 401(k), you’ll likely owe taxes in the year the contributions were made. Roth 401(k)s are not subject to required minimum distributions. |
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 the type of account, how much you earn and whether you have an employer-sponsored retirement plan. 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.
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 investments such as real estate or private placements, there’s another choice—self-directed IRAs. Self-directed IRAs come with some unique risks that investors should carefully consider before investing.
Like employer-sponsored retirement plans, there are traditional and Roth IRAs. Both offer potential tax advantages.
If a child has earned income, a designated adult can open a custodial IRA on their behalf. Additionally, a parent, guardian or other authorized individual can open a Trump Account for an eligible child under age 18. Trump Accounts are a type of traditional IRA that have no earned income requirement but are subject to certain special rules on contributions, investments, distributions and reporting until the year in which the child turns 18.
| Traditional IRA | Roth IRA | |
|---|---|---|
| Eligibility | For most traditional IRAs:
Exceptions:
| Eligibility requirements are the same as for traditional IRAs, except that income-based eligibility rules apply. |
| Contributions | Contributions up to the IRS limit can be made any time up to your tax filing date for that year (April 15 for most people). Contributions may be tax deductible depending on your income and whether you’re covered by a retirement plan through your employer. Individual contributions to Trump Accounts are not tax-deductible before January 1 of the year in which the child turns 18. After that, traditional IRA rules apply. You can roll over (transfer) proceeds from a 401(k) plan into an IRA. (This does not affect contribution limits.) | Contribution requirements are the same as for traditional IRAs, except that contributions are not tax deductible. |
| Withdrawals | Withdrawals are subject to required minimum distributions. In general, distributions from a traditional IRA are taxed as ordinary income. A 10% tax penalty will apply to any withdrawal—of contributions, earnings or both—before you reach age 59½, with limited exceptions as defined by the IRS. For Trump Accounts, withdrawals are generally not permitted before January 1 of the year in which the child turns 18. After that, traditional IRA rules apply. | Roth IRAs don’t require withdrawals until after the death of the owner. Distributions from a Roth IRA aren't taxed as long as you meet certain criteria. A 10% tax penalty will apply to any earnings you withdraw before you reach age 59½, unless you meet an exception set by the IRS. Also, a 10% tax penalty may apply if you take a distribution from a Roth IRA that has been open for less than five years. |
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 your portfolio’s performance, 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 professional or ask your plan administrator or human resources department about any features you’d like clarified or explained in more detail.
While personal property or taxable investment accounts generally transfer through wills or trusts, retirement accounts pass directly to named beneficiaries.
If you participate in an employer-sponsored retirement plan, your spouse is typically required to be your primary beneficiary unless they sign a waiver relinquishing these rights. For IRAs, you generally have more flexibility and can designate multiple beneficiaries for a single account or different beneficiaries for different accounts. Remember that beneficiary designations typically override instructions in your will and remain valid even through major life changes. This makes regular reviews essential.
Consulting with a tax and/or legal professional, such as an estate attorney, and/or an estate planner might help you ensure that your beneficiary designations align with your overall financial and estate planning goals. Learn more from the IRS about potential withdrawal requirements and tax considerations.
Employer plans such as 401(k)s carry asset-based fees and might have other fees or 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. Rather, they’re subtracted before your investment 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.
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.
There are different ways to evaluate performance, and benchmarks such as key stock or bond indexes can also serve as helpful reference points. 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 can 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 statements on a monthly basis.
Retirement plan policy discourages taking out money early. You generally cannot make withdrawals before age 59½ without paying an early withdrawal penalty, which 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 federal tax laws. Notably, withdrawals are generally prohibited in Trump Accounts until the year in which the account beneficiary turns age 18.
In any event, before you make any early withdrawals, check with your tax or legal adviser to be sure you're following the rules and understand any taxes or penalties that you might incur.
You might be able to withdraw from your employer-sponsored retirement account to meet the needs of a financial emergency. Within rule parameters set by the IRS, your employer determines whether to allow these withdrawals, known as hardship distributions, and for which qualifying circumstances. Hardship distributions are usually subject to income tax, and you might also have to pay an early withdrawal penalty. Check with your employer or plan administrator for information about special considerations and any penalties or fees.
There are rules that govern when you must start withdrawing retirement assets. You generally must start taking required minimum distributions (RMDs) from traditional retirement plans when you reach age 73. (This will change to age 75 in 2033.) RMD rules don’t apply to Roth account owners during their lifetime; however, these rules do apply to the beneficiaries of Roth accounts.
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 made with post-tax contributions (your basis) or that is tax-free (such as qualified distributions from designated Roth accounts).
When it comes to managing your retirement accounts, resources are available that can help. Here are a few places where you can look for information and advice.
If you believe there’s a problem with your employer-sponsored retirement plan, contact your plan administrator or employer first. If you're not satisfied with their response, you can contact the DOL’s Employee Benefits Security Administration (EBSA), 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.
If you have a problem involving a brokerage firm serving as the 401(k) fund administrator or a registered financial professional who provided recommendations or handled transactions for an IRA, you have the option of filing a complaint with FINRA.
During the span of your employment, you might have reason to consider borrowing from your retirement account or, if you change employers, rolling your assets into a new plan or an IRA. In both cases, there are important factors to consider.
If you need cash, you might be tempted to borrow from your employer-sponsored plan, if permitted, rather than applying to a bank or other lender. With most plans, you would repay your loan through payroll deductions.
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. Note that you can only borrow money from employer-sponsored plans, not from any type of IRA.
The IRS sets limits on the maximum amount you can borrow, while your employer or 401(k) provider sets the interest rate you’ll pay and the term of the loan. When you borrow from your account, the money usually comes out of your account balance in equal portions from each of the different investments.
Caution: If you leave your job with an outstanding loan balance, you’ll typically have 90 days to repay the balance. Failure to repay results in default, with the remaining balance treated as a taxable withdrawal. If you’re younger than 59½, you might owe the 10 percent early withdrawal penalty as well.
Consider talking with an investment professional or tax professional about the potential impacts of borrowing from your retirement account.
Whether you're getting ready to change jobs or 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 funds in your current account as is or move—i.e., roll over—some or all of your savings into another account. Your choices will typically include:
Be aware that the last option—cashing out your account—is costly, potentially involving significant taxes and early withdrawal penalties. Talk with a tax adviser about the tax implications based on your personal situation.
For additional information on rollovers, see the IRS’s Rollovers of Retirement Plan and IRA Distributions.
