You know you need to start retirement planning, but it can be daunting. How do you know where to begin when there are so many options? Social Security, IRAs, and 401(k)s — what do they all mean?
The answer isn’t always cut and dried, either. It depends on factors like your current needs, age, financial goals, and risk level. Your employment situation also matters as employers offer different benefits and matching contributions.
Whether you’re early in the retirement journey or you’re trying to make “catch-up” contributions to bulk up your retirement savings, this article explains the basics of retirement accounts and what you need to know to get started.
1. To Diversify Or Not to Diversify?
Before you start investing funds into a retirement account, you need to decide whether diversifying will help you reach your goals faster or whether allocating everything you have into limited assets is best.
If you’ve worked for an employer in the United States, there’s a good chance that you already have Social Security benefits under your belt. Many businesses also offer retirement accounts like 401(k)s and the option to invest in individual retirement accounts (IRAs).
Between these employer-sponsored accounts and your personal savings, you already have a diverse portfolio. However, if you weren’t taking advantage of the full contribution limits and tax laws or you worked for yourself, you may still not have enough in your account to get you through your Golden Years as comfortably as you’d like. For more information on using tax diversification to build greater wealth, see this article by OJM Group.
2. Employer-Sponsored Retirement Plans
As of 2023, the Bureau of Labor and Statistics reports that more than 64% of the U.S. workforce was made up of people working for a single employer as a W-2 employee. These individuals likely received the option to invest in an employer-sponsored retirement plan.
In 2025, the contribution limit for a 401(k) or Roth account was $23,500, and the catch-up limit for those over the age of 50 was $7,500. Those aged 60-63 can use the Secure Act 2.0’s catch-up limit of $11,250.
But what does that mean?
401(k) Basics
A traditional 401(k), the most common employer-sponsored retirement plan, means that you can invest up to the contribution limit in pretax dollars. These funds grow tax-deferred until retirement.
401(k) accounts are taxed later. Your taxable income is reduced while you’re working and receiving a greater income. You pay taxes on the money when you withdraw it. However, any income you receive based on the earnings from your investment is not taxed. There's no penalty as long as you withdraw from the account after age 59½. Minimum distributions (RMDs) are required unless you’re still working or you meet other stipulations.
Roth Accounts
Some employers offer Roth 401(k) accounts, which operate like a traditional 401(k) but with one major difference: the money that funds a Roth 401(k) is already taxed. So, there is no tax liability later when you withdraw your investment and earnings.
403(b)
Another type of employer-sponsored retirement plan is the 403(b), also connected with the Roth 403(b). These plans only apply to those working in the public sector or for 503(c)(3) organizations. The same contribution limits are adhered to, and the 403(b) is funded with pre-tax dollars, while the 403(b) Roth is funded with after-tax dollars. The other difference is that 403(b) plans are usually limited to mutual funds or annuities.
457(b)
The 457(b) and its counterpart, the Roth 457(b), are available for those working for the state or local government. These plans work like the 401(k) and have the same contribution limits. However, you can withdraw funds from a 457(b) without early tax penalties if you leave your employer (although you’ll have to pay income tax on the withdrawal). A 457(b) Roth plan is funded with post-tax dollars.
3. Less Common Retirement Plans
Some employers offer lesser-known retirement plans like the SEP IRA and Roth SEP IRA. Contribution limits for these plans are higher: either $70,000 or 25% of your salary, whichever is less.
The Simplified Employee Pension (SEP) IRA is funded by contributions from your employer made on your behalf to an IRA in your name. The assets in your account grow tax-deferred, and your investment funds aren’t taxed until you begin withdrawing from the account.
The Roth SEP IRA, which wasn’t permitted until the Secure Act 2.0, works like other Roth accounts, funded with post-tax dollars.
SIMPLE IRAs are also a possible investment account for you. These contribution limits, as of 2025, are $16,500, with a $3,500 catch-up limit. In a SIMPLE IRA, short for Savings Incentive Match Plan for Employees, you can choose to defer your income, letting your employer make contributions from your salary on your behalf. These funds grow tax-deferred until you withdraw them.
Self-employed individuals with no employees can elect to create a Solo 401(k). The same contribution limits and rules as the traditional 401(k) apply, except the business owner can contribute as an employer and an employee, for a total combined limit of $69,000 (as of 2024) and $76,500 for those over 50.
Self-employed individuals and those looking for more investments than their employers offer can also opt for an IRA (individual retirement account). Traditional IRAs have a contribution of $7,000, with an extra $1,000 catch-up limit. IRAs invest your money in stocks, bonds, or mutual funds and are provided through financial institutions instead of employers. Contributions may be tax deductible.
Conclusion
Choosing where to invest your hard-earned money is an important decision not to be made lightly. How much to invest and where to put it depends on many factors. Before you begin your retirement account journey, consider reaching out to an expert financial advisor to get personalized tips and answers to your questions.
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