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Understanding retirement accounts
Key Points
- Plan for a retirement that could last longer than your career.
- An employer-sponsored plan may be the foundation of your retirement savings.
- You'll likely need more than one type of account to save for retirement.
There are many types of accounts that can help you save for a lengthy retirement — and most people rely on more than one account to reach their retirement goals. Understanding the features and benefits of each will make it easier to choose the right ones.
Employer-sponsored plans with employee contributions
A good starting point for retirement saving is your employer-sponsored plan. Employer plans usually accept automatic contributions from your paycheck, and the money you contribute has the potential to grow tax-deferred (or tax free for qualifying Roth contributions).
In addition, if your employer offers to match your plan contributions, you should consider taking full advantage of this opportunity. An employer match will supplement your savings without any extra effort on your part. If you're not sure if you have an employer match, you can ask your HR or benefits department for your employer summary plan description.
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401(k) plan |
403(b) plan |
Governmental 457(b) |
SIMPLE IRA |
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| Which type of employer can offer the plan? | For-profit or nonprofit organizations | 501(c)(3) nonprofit organizations and public schools | Any state or local government entity | For-profit, nonprofit or government organizations with fewer than 100 employees |
| Who is eligible to participate? (Some employers may be less restrictive) | Employees age 21 or above, with at least one year of service (1000 hours). Part time employees with 3 years of service (500 hours per year) starting in 2024 | Generally, all employees are eligible | Eligibility is generally at the employer's discretion | Employees with at least $5,000 of compensation in any two previous years of service and who anticipate compensation of at least $5,000 in the current year |
| How much of your salary can you contribute for 2023? | $22,500, or $30,000 if you are age 50 or above | $22,500, or $30,000 if you are age 50 or above (additional catch-up contributions may also be available) | $22,500, or $30,000 if you are age 50 or above (additional catch-up contributions may also be available) | $15,500, or $19,000 if you are age 50 or above |
| Additional considerations |
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Pre-Tax vs. Roth deferrals
Some employer plans offer you the option to make Roth 401(k), Roth 403(b) or Governmental 457(b) contributions instead of the standard pre-tax contribution to your 401(k), 403(b) or Governmental 457(b) account. Determining which contribution option to choose depends in part on your tax bracket now and in retirement, in addition to the amount of time you have before you retire.
- Pre-tax contribution. When you make a pre-tax contribution to a retirement plan, you receive a tax benefit right away, but you will have to pay taxes on the money when you withdraw it. In general, a person in a higher tax bracket who anticipates being in a lower tax bracket at retirement may find a pre-tax deferral more favorable.
- Roth contribution. You won't receive a current tax benefit, but qualified distributions are tax-free in retirement. In general, a person in a lower tax bracket who anticipates being in a higher tax bracket in retirement may find a Roth contribution more favorable.
There are other factors to consider as well so be sure to talk with your Ameriprise financial advisor and tax professional before making a decision.
Employer-funded plans
Some employers offer plans where all eligible employees automatically benefit, without having to make contributions from their salary. Even though you do not need to personally contribute to these plans, you'll still need to select beneficiaries, may need to choose the investments and will want to factor them into your overall plan for retirement.
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Profit sharing |
SEP |
Pension/defined benefit |
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| Which type of employer can offer this plan? | Primarily for-profit organizations, though nonprofits and government employers may also establish | For-profit, nonprofit or government organizations | For-profit, nonprofit or government organizations |
| Who is eligible to participate? (Some employers may be less restrictive) | Employees with two years and at least 1,000 hours of service per year, if there is immediate vesting (with a vesting schedule, one year and 1,000 hours of service) | Employees age 21 or above who perform service in at least three of the prior five plan years, and who receive at least a required minimum amount of compensation in the current year ($750 in 2023) | Employees with one year and 1,000 hours of service |
| What is the maximum that can be contributed for 2023? | 100% of compensation, up to $66,000 (employer's deduction is capped at 25% of eligible payroll) | 25% of compensation, up to $66,000 | Contributions must not exceed the amount required to fund the maximum annual benefit (For 2023, the lesser of $265,000 or 100% of average compensation for highest three consecutive years) |
| Additional features |
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Individual retirement accounts (IRAs)
If you're already participating in an employer-sponsored plan but are able to save more, or if you don't have access to an employer plan, you should consider contributing to an IRA. IRAs allow you to hold a wide variety of investment and offer different tax benefits depending on your income level and the type of IRA you select.
Traditional IRAs can offer a particular tax advantage if you expect to be in a lower tax bracket when you retire. If you qualify for pre-tax contributions, your current taxes may be reduced and the taxes you pay when you withdraw the money may be less than you would pay now. However, as you consider a traditional IRA, keep in mind that at age 72 you must take required minimum distributions (RMDs).
A Roth IRA may be an advantageous way for you to invest if you are in a lower tax bracket, especially if you anticipate being in a higher tax bracket in retirement. The earnings in your Roth IRA are tax-free upon withdrawal (if certain requirements are met). This can be a powerful advantage. Assuming that you expect your tax bracket to be higher in retirement than it is now, there may be a significant benefit to giving up the current tax deduction and making do with less today in order to gain the tax-free growth and withdrawal.
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Traditional IRA |
Roth IRA |
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| Who is eligible to make contributions? |
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| What is the maximum you can contribute for 2023? (Limits apply to combined Traditional and Roth contributions) | Lesser of $6,500 ($7,500 if you are age 50 or above) or 100% of earned income | Lesser of $6,500 ($7,500 if you are age 50 or above) or 100% of earned income |
| How are contributions and distributions (withdrawals) taxed? |
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| Additional considerations |
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More ways to save
While employer-sponsored plans and IRAs offer important opportunities for retirement savings, they may not be enough to provide the retirement you want. Personal savings will likely play a critical role in funding your retirement as well. It is important to think about all of the vehicles available as you plan for a secure retirement.
Take the next step
An Ameriprise financial advisor can help identify which accounts are right for you, and allocate investments to each account. As your needs and circumstances change over time, your financial advisor will adjust your plan to help ensure you stay on track.