Table of Contents

How do retirement accounts work?

Types of retirement plans

Can you have more than one retirement plan?

How to choose the right retirement plan

The bottom line

LearnSaving for RetirementUnderstanding Different Types of Retirement Plans

Understanding Different Types of Retirement Plans

Sep 9, 2022


6 min read

Some retirement accounts are offered through the workplace, while others will need to be opened individually; in many cases, future retirees can own (and contribute to) more than one type of account.

To enjoy years of retirement, one needs to first have adequate funds set aside. Preparing for retirement may involve a combination of investment efforts, which generally fall into three buckets. 

The first bucket is pre-tax or “tax-deferred,” which includes traditional 401(k)s and IRAs, where investors defer paying taxes on a sum of money until retirement, when they withdraw it. The second bucket, which includes Roth 401(k)s and IRAs, is considered “tax-free,” because investors pay tax on the money when you earn it, but any withdrawals from those accounts in retirement are tax-free. The last bucket is taxable, which is your brokerage account. 

Retirement plans comprise the first two buckets, but there are multiple types within each. Read on to learn the different types of retirement plans available and how each one can bring investors closer to their retirement savings goals.

How do retirement accounts work?

Tax-advantaged retirement accounts were created by the government to incentivize saving for the future. These retirement plans can be invested in a variety of ways including different stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. In some cases, retirement plans for individuals can even be invested in real estate.

When an investor contributes money to a retirement plan, the funds are meant to stay there until they reach a minimum age of 59½. Once the account owner reaches that age, they may begin taking withdrawals (distributions) from the account without penalty. If funds are withdrawn before then, early withdrawal penalties are typically imposed, though there are some exceptions. Depending on the type of plan, income taxes may also be due on the distribution that same calendar year.

Account owners aren’t required to begin taking distributions from their retirement account at age 59½, but they will need to take required minimum distributions (RMDs) from most accounts starting at age 72. Roth IRAs are the exception to this rule. Failure to take the full RMD after 72 can result in a penalty of 50% of the undistributed amount.

Types of retirement plans

There are many different retirement plans to consider when developing a savings strategy for the future. Here are some of the types of retirement plans and what they offer.

Retirement plans offered by employers

Some retirement plans must be sponsored by an employer.


The primary employer-sponsored account is the 401(k) retirement plan. These accounts are offered through the workplace, and savings can be invested in a range of funds chosen by the employer. Often, 401(k) contributions can be made through automatic payroll deductions, and some employers offer matching contributions.

There are two different types of 401(k)s offered by employers: traditional and Roth, which allow for up to $20,500 in contributions for 2022 (those over 50 can make a catch-up contribution of $6,500).

  • Traditional 401(k).

    Contributions into a traditional 401(k) plan are made with pretax dollars and are tax-deductible in the year they’re made. The account is able to grow tax-free, but distributions in retirement are considered ordinary income for tax purposes.

  • Roth 401(k).

    The Roth 401(k) behaves a bit differently. Contributions to the plan are made with after-tax dollars; the contributions are not deductible from taxable income that year. Come retirement, contributions and gains can be deducted without any additional taxes being due on the money.

Solo 401(k)s

A solo 401(k), also known as a self-employed 401(k) is a type of tax-deferred retirement account made available to self-employed individuals. To qualify, the individual must be a sole proprietor, and their business cannot have other full-time employees, with the exception of their spouse, who may qualify for the plan.

These accounts work just like traditional workplace 401(k)s, with one crucial exception: the account holder can contribute as both an employee and an employer. The contribution limit as an employee is $20,500 (just like a traditional 401(k)). The contribution limit as an employer is up to 25% of one’s self-employment income after deducting half of one’s self-employment taxes and one’s employee contribution to the 401(k). Net self-employment income cannot exceed $290,000 for the purposes of calculating one’s personal contribution limit.


There are also SEP IRAs, or simplified employee pension IRAs. These IRAs are one of the primary types of retirement accounts for self-employed individuals and are also available to small business owners and their employees. They allow for up to $61,000 in annual contributions for 2022 or up to 25% of the employee’s income, whichever is less.

Retirement plans not offered by employers

Some retirement savings plans are not offered by an employer and need to be opened independently. The primary two are:

  • Traditional IRAs.

    These offer the potential for tax-deductible contributions. Depending on factors like overall income and whether or not the account owner’s employer also offers a retirement plan, up to $6,000 (or $7,000 for those 50 and up) of the contributions may be deductible. In retirement, traditional IRA distributions are taxed as ordinary income.

  • Roth IRAs.

    These accounts are funded with after-tax dollars, which are not deductible come tax time. As with a traditional IRA, contributions to a Roth IRA can grow tax-free until retirement. At retirement, Roth IRA distributions (including both contributions and gains) are also taken tax-free.

Unlike other retirement plans, Roth IRAs do not have required minimum distributions as long as the account owner is alive. Upon the account owner’s death, however, the beneficiary needs to withdraw the savings within 10 years.

Both traditional and Roth IRAs allow for up to $6,000 in contributions for 2022 (plus an additional $1,000 catch-up contribution for those 50 or older). These accounts can be opened at a number of different financial institutions, including banks, credit unions, and brokerages.

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Can you have more than one retirement plan?

Investors can indeed have more than one retirement savings account. For example, someone with an employer-sponsored 401(k) could also choose to contribute to a traditional IRA. And an individual with a Roth IRA can also contribute to a traditional IRA.

There may be contribution and tax deduction limits on some of these accounts, depending on what’s offered through the workplace, the individual’s overall income, and whether or not their spouse also has an employer-sponsored retirement plan.

How to choose the right retirement plan

There is no perfect retirement plan strategy, as everyone has their own needs and access to different accounts. However, there are some ways to determine which accounts might better suit an investor’s needs, compared to the other options available.

Choosing the right retirement plan involves considering:

  • The plans offered by an employer, including fees and available investment funds.
  • How much one can afford to contribute to these accounts each year.
  • Whether the individual will be in a higher or lower tax bracket in retirement than the one they’re in now.

Whether or not their income allows IRA contributions to be tax-deductible.

The bottom line

There are many different types of retirement accounts to consider when strategizing for the future. Each offers its own rules for contribution limits, investment options, and tax advantages. Some retirement accounts are offered through the workplace, while others will need to be opened individually; in many cases, future retirees can own (and contribute to) more than one type of account.


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