A retirement savings account is a bank or investment account designed to hold money you set aside for after you stop working

Unlike a regular savings account, a retirement account comes with tax advantages — the government lets you either deduct contributions from your income taxes now, or withdraw money tax-free later, depending on the type. The tradeoff is that you generally cannot touch the money before age 59½ without paying a penalty, though some accounts have exceptions for hardship or first-time home purchases.

The most common types are the 401(k) (offered through an employer), the IRA or Individual Retirement Account (which you open yourself), and the Roth IRA (a variation of the IRA with different tax rules). Each has different contribution limits, withdrawal rules, and tax treatment. Your choice depends on whether your employer offers a plan, how much you earn, and whether you want to pay taxes now or later.

Key Takeaways

  • A retirement savings account lets you set money aside for later life with tax advantages that a regular savings account does not offer.
  • The three main types are 401(k)s (employer-sponsored), traditional IRAs (self-opened, taxes paid in retirement), and Roth IRAs (self-opened, taxes paid now).
  • You cannot withdraw money before age 59½ in most cases without paying a 10 percent penalty plus income tax on the withdrawal.
  • Contribution limits change each year and vary by account type and your income level.
  • If your employer offers a 401(k) match, contributing enough to get the full match is usually the first step, because it is assistance programs.

How the tax advantage works: traditional versus Roth

A traditional retirement account (traditional IRA or 401(k)) lets you deduct your contributions from your income taxes in the year you make them. If you earn $60,000 and contribute $7,000 to a traditional IRA, you report only $53,000 as taxable income. You pay no tax on the money while it sits in the account and grows. When you withdraw it in retirement, you pay income tax on the full amount at whatever tax rate applies then.

A Roth account (Roth IRA) works the opposite way. You contribute money you have already paid taxes on. The money grows tax-free, and when you withdraw it in retirement, you owe no tax at all — not on the original contribution or the growth. This is valuable if you expect to be in a higher tax bracket later, or if you simply want to know exactly what you will have to spend.

The choice between them depends on your current tax bracket and what you expect it to be in retirement. If you are young and in a low bracket now, Roth often makes sense. If you are older, earning a high income, and expect lower taxes in retirement, traditional often makes sense. Many people use both.

401(k) plans: employer-sponsored retirement accounts

A 401(k) is a retirement account your employer sets up and administers. You authorize your employer to deduct a portion of each paycheck and deposit it into the account. The money comes out before taxes are calculated, so a 401(k) contribution lowers your taxable income for the year, just like a traditional IRA does.

Many employers also offer a match — they contribute money on your behalf if you contribute a certain amount. A common match is 50 cents for every dollar you contribute, up to 6 percent of your salary. If you earn $50,000 and contribute $3,000 (6 percent), your employer adds $1,500. That is immediate return on your money, and it is one of the strongest reasons to open a 401(k) if your employer offers one.

401(k) contribution limits are higher than IRA limits. For 2024, you can contribute up to $23,500 per year (or $30,500 if you are 50 or older). IRAs max out at $7,000 per year ($8,000 if you are 50 or older). If your employer offers a 401(k) with a match, contributing enough to capture the full match should come before other savings goals.

IRAs: retirement accounts you open yourself

An IRA is a retirement account you open at a bank, credit union, or brokerage firm on your own — your employer is not involved. You can open one whether or not you have access to a 401(k) at work. There are two main types: traditional IRA and Roth IRA, described above.

To open an IRA, you need earned income — money from a job or self-employment. You cannot open one if you have no income that year. You choose a financial institution (many people use the same bank where they have a checking account), fill out an application, and decide how much to contribute and what to invest the money in. Some IRAs are simple savings accounts that earn interest; others let you invest in stocks, bonds, or mutual funds.

IRAs have lower contribution limits than 401(k)s but more flexibility in how you invest the money. If you are self-employed or your employer does not offer a 401(k), an IRA is often your main retirement savings tool. If you have both a 401(k) and an IRA, you can contribute to both in the same year, but your total contributions across all retirement accounts cannot exceed the annual limit for each type.

Withdrawal rules and the 59½ age threshold

Most retirement accounts penalize you for withdrawing money before age 59½. The penalty is 10 percent of the amount you withdraw, plus you owe income tax on the withdrawal. So if you withdraw $10,000 from a traditional 401(k) at age 45, you pay $1,000 in penalty plus income tax on the full $10,000.

There are exceptions. You can withdraw from a 401(k) without penalty if you separate from your employer after age 55 (the "Rule of 55"). You can withdraw from an IRA without penalty for a first-time home purchase (up to $10,000 lifetime), to pay for education, or for certain medical expenses. Roth IRAs have a special rule: you can always withdraw your original contributions (not the growth) without penalty, at any age.

At age 73, you must begin taking Required Minimum Distributions (RMDs) from traditional 401(k)s and traditional IRAs — the government requires you to withdraw a certain amount each year and pay tax on it. Roth IRAs do not require distributions during your lifetime. This is another reason some people prefer Roth accounts if they do not need the money in retirement.

Contribution limits and how they change

The IRS sets contribution limits each year and adjusts them for inflation. For 2024, a traditional or Roth IRA allows up to $7,000 per year ($8,000 if you are 50 or older). A 401(k) allows up to $23,500 per year ($30,500 if you are 50 or older). These numbers change annually, usually by $500 increments.

There are also income limits for Roth IRAs. If you earn above a certain threshold, you cannot contribute to a Roth IRA directly, though you may be able to use a "backdoor Roth" strategy (converting a traditional IRA to a Roth). Traditional IRAs have no income limit, but if you are covered by a 401(k) at work, your ability to deduct traditional IRA contributions phases out at higher incomes.

Check the IRS website or your financial institution each year to confirm the current limits for the account type you use. Contribution limits are separate from the amount you can have in the account — you can hold hundreds of thousands of dollars in a retirement account; you just cannot add more than the annual limit each year.

Self-employed and small-business retirement accounts

If you are self-employed or own a small business, you have additional retirement account options. A SEP IRA (Simplified Employee Pension) lets you contribute up to 25 percent of your net self-employment income, up to a much higher annual limit than a regular IRA. A Solo 401(k) is a 401(k) designed for self-employed people with no employees (or only a spouse). A SIMPLE IRA is for businesses with 100 or fewer employees.

These accounts are designed to let self-employed people and small-business owners save more for retirement than they could with a regular IRA. They require more paperwork and record-keeping than an IRA, but the higher contribution limits often make them worthwhile if you have significant self-employment income.

Frequently Asked Questions

Can I have both a 401(k) and an IRA at the same time?

Yes. You can contribute to both in the same year. However, if you have a 401(k) at work and also contribute to a traditional IRA, your ability to deduct the IRA contribution may be reduced depending on your income. Roth IRA contributions have their own income limits. Check with your financial institution or tax preparer about how your specific situation affects deductions.

What happens to my retirement account if I change jobs?

Your 401(k) stays in the account — your employer cannot take it. You can leave it there, roll it into an IRA at a bank or brokerage, or roll it into your new employer's 401(k) if they allow it. A rollover moves the money without triggering taxes or penalties. If you withdraw the money directly instead of rolling it over, you owe income tax and a 10 percent penalty.

Can I withdraw money from a retirement account for an emergency?

You can, but it usually costs you. Withdrawals before 59½ trigger a 10 percent penalty plus income tax. Some 401(k)s allow loans against your balance instead of withdrawals, which avoids the penalty. Roth IRAs let you withdraw contributions (not growth) at any time without penalty. Before withdrawing, explore whether your account allows loans or hardship withdrawals, which may have fewer consequences.

What is the difference between a retirement account and a regular savings account?

A regular savings account has no contribution limits and no withdrawal penalties, but you pay taxes on the interest each year. A retirement account has annual contribution limits and withdrawal penalties before 59½, but the tax advantages mean your money grows faster because you are not paying taxes on the growth each year.

Do I need earned income to open a retirement account?

For most retirement accounts, yes — you need income from a job or self-employment. A spouse with no income can open a spousal IRA if their spouse has earned income. If you are retired or have no income, you cannot open a new IRA or 401(k), but you can continue to hold and withdraw from accounts you opened earlier.