Hopefully you know how important retirement savings is. Most Americans can no longer rely on pensions or Social Security when we get to retirement age. And we’re typically living a lot longer than generations before us. So it’s up to us to save our own money. But the different types of retirement accounts can be confusing, which can hold us back from getting started. So here are a few of the most comment retirement accounts and the differences between them. With this information, you can decide which accounts are available and/or right for you.

If you end up going with a 401k or 403b, your employer will chose the brokerage company where your money will stay. If you decide to open an IRA of any kind, there are many businesses that you can choose from.

401k

This type of retirement account is probably the one you hear about most. A 401k is a retirement plan that is set up by an employer for individual employees. The money is taken out of an employee’s paycheck before taxes, which means that the money is not taxed at that time. The money will be taxed when withdrawn during retirement. One great benefit of this type of plan is that an employer can offer a match amount, based on what an employee is contributing on their own. Make sure you’re always contributing at least the amount that is matched by your employer! One downside of that employer match is that you don’t necessarily vest in it right away, and if you leave the company before you’re fully vested, you’ll have to leave the match amount behind. (But don’t worry, you always take the amount you put in yourself.)

The annual contribution limit for a 401k is $18,500. Most of us don’t necessarily have to worry about reaching that limit in a year, but it does help you in the long run to max it out. You shouldn’t worry about opening a separate IRA until after you’ve started maxing out your 401k.

This is right for you if: You’re employed and your employer offers this type of account.

403b

A 403b is a retirement plan that is set up for employees by organizations like public schools, non-profits, and religious groups. If you have worked at a nonprofit, it’s likely you have heard of 403bs. It works just like a 401k but the administrative costs are lower for the tax-exempt employer.

The annual contribution limit for a 403b is $18,500, just like for a 401k. As I mentioned above, you should max out this account before you start contributing to an IRA.

If you leave your organization, you have a few options for what to do with your 401k or 403b:

This is right for you if: You’re employed and your employer offers this type of account.

Roth IRA

“IRA” stands for “individual retirement account”. Anyone can open an IRA, whether or not they are employed. You will want to open an IRA if your employer doesn’t provide a 401k or 403b. You can also open an IRA if you have maxed out your 401k or 403b and still have money left to invest. With a Roth IRA, you pay taxes at the time you contribute (meaning you are using post-tax funds) and you can use this money tax-free when you retire. This is a great option if you are pretty sure you’ll be at a higher tax bracket when you retire than you are. You’ll save money in taxes later.

The annual contribution limit for an IRA is $5,500. This total amount applies even if you have more than one IRA. You cannot contribute more than $5,500, no matter how many IRA accounts you have. This limit increases to $6,500 if you are over 50 while contributing.

There are also income limits when it comes to contributing to a Roth IRA. Fidelity explains it well:

Screen Shot 2018-04-04 at 7.15.25 PM.png

This is right for you if: You’re employed but your employer doesn’t offer a retirement plan; you’re employed and you’re maxing out your employer-provided retirement plan and want to invest more; you want to pay taxes now so you don’t have to pay more later.

Traditional IRA

A traditional IRA is just like a Roth IRA but it is tax exempt when you first put money into it. Yes, you put the money into your account after taxes have already been taken out, but then you write off that contribution amount on your taxes. This keeps money in your pocket now, and you will be taxed when you access the money after retirement. This is a good option if you’re fairly certain you won’t be at a higher tax bracket when you retire.

Like I mentioned above, the annual contribution limit for a traditional IRA is $5,500 (and $6,500 if you’re over 50 years old). There is no income limit for traditional IRAs, but there is a limit to how much you can deduct from your taxes:

Screen Shot 2018-04-04 at 7.16.36 PM.png

This is right for you if: You’re employed but your employer doesn’t offer a retirement plan; you’re employed and you’re maxing out your employer-provided retirement plan and want to invest more; you want to save in taxes now and pay them later.

SEP IRA

I had never heard of a SEP IRA until I quit my day job and needed to roll over my old 401k. “SEP” stands for “simplified employee pension” and it’s an account set up for people like me, who are self-employed. A major benefit of this IRA versus others is that the contribution limit is higher. With a SEP IRA, you can contribute up to 25% of your annual income, regardless of how much that income is. This benefit is presumably to make up for the fact that self-employed people don’t have a 401k or 403b match from their employer.

This is right for you if: You’re self-employed and you want to be able to invest more than $5,500 each year in your retirement.

SIMPLE IRA

“SIMPLE” stands for “Savings Incentive Match Plan for Employees”. It’s an IRA plan that allows both the employer and employee contribute. This kind of plan is typical for a smaller employer that might not be able to provide a 401k or 403b, but wants to help employees save for retirement.

The annual contribution limits for this type of IRA differ from others. The maximum contribution is $12,500, which includes both the employer and employee contribution. If you’re over 50, the contribution limit is $15,500.

This is right for you if: You’re employed and your employer only offers this type of retirement account.

More resources:

Do you have a retirement account? Which one(s)? Share in the comments!