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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. As of January 1, 2025, higher catch-up limits for individuals aged 60 – 63 can also be permitted within employer-sponsored 401(k), 403(b), 457 and Thrift retirement savings plans.
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.
Beginning January 1, 2025, 401(k) and 403(b) plans that were established after December 29, 2022, must automatically enroll eligible employees; you can choose to opt out.
Because individual needs vary, 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 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.
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 typically 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.
Beginning in January 2025, 401(k) and 403(b) plans established after December 29, 2022, are required to automatically enroll eligible employees at an initial rate of at least 3 percent but not more than 10 percent of pay. Then, each following year, the deferral rate for continuing participants must be increased by at least 1percent per year, up to at least 10 percent but not more than 15 percent. Employees may opt out of automatic enrollment or any annual increases. (Small and new businesses, as well as church and governmental plans, are exempt from this requirement.)
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.
| 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 taxable income so don’t reduce gross income reported to IRS. Employer matches can be treater either as pre-tax dollars or as direct contributions to employees’ Roth 401(k)s, depending on how the plan is set up. Consult with your employer for details about your plan. Note that pre-tax employer matches are pre-tax income and must be accounted for separately from employee contributions. |
| Withdrawals | Contributions (your own and any matches) and earnings are taxed at your ordinary income tax rate upon withdrawl. 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 match 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 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.
| Traditional IRA | Roth IRA | |
|---|---|---|
| Eligibility | Employee must have earned income of at least the amount contributed, except in cases of spousal IRAs. Regular contributions are allowed regardless of age. | |
| There’s no upper limit on income. | 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. | Contribution requirements are the same as traditional, except that contributions are not tax deductible. |
| Withdrawals | Withdrawals are subject to required minimum distributions. 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. | Roth IRAs don’t require withdrawals until after the death of the owner. 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 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.
While personal property or taxable investment accounts generally transfer through wills or trusts, retirement accounts and proceeds from insurance policies 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 and insurance policies, you generally have more flexibility and can designate multiple beneficiaries for a single account or different beneficiaries for different accounts. You also typically can name contingent beneficiaries in case your primary beneficiaries predecease you, can't be located or decline the assets. 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 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.
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.
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 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. The IRS provides information about circumstances that may qualify as a hardship withdrawal, including:
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 likely have to pay taxes on the amount you withdraw, plus a 10 percent penalty if you’re under age 59½.
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. You generally must start taking required minimum distributions (RMDs) when you reach age 73. (This will change to age 75 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).
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.
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.
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 which case you might be able to pay back the loan over a longer period.
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.
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.
Consider talking with an investment professional or tax adviser about the potential impacts of borrowing from your retirement account.
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:
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 typically maintain its tax-deferred status until you withdraw it.
The last option on the list—cashing out your account—is a simple but costly one, 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.
