In the United States, retirement accounts are structured to encourage long-term saving through a combination of tax benefits, contribution limits and withdrawal rules. Most Americans rely on a combination of employer-sponsored plans and individual retirement accounts to build enough income for later life. The type of account used depends on employment status, income level, and how much control the individual wants over their investments. Understanding how each account works — and how they fit together — makes the difference between a stable retirement and a shortfall that’s hard to recover from.
Employer-sponsored accounts
401(k)
The 401(k) is the most common employer-sponsored retirement plan in the U.S. Employees contribute a portion of their salary before taxes, reducing their taxable income. Employers often match a percentage of the employee’s contributions, usually up to 3–6% of salary.
Contribution limits for 2025 are $23,000 for those under 50, and $30,500 for those aged 50 and older (including the $7,500 catch-up). Funds grow tax-deferred until withdrawal, which is taxed as regular income.
Most 401(k)s offer a limited set of investment options — typically mutual funds and target-date funds. Some plans offer a Roth 401(k) option, where contributions are made with after-tax income but withdrawals in retirement are tax-free.
Withdrawals before age 59½ usually incur a 10% penalty plus income tax unless an exception applies. Required minimum distributions (RMDs) start at age 73.
403(b) and 457(b)
These are similar to 401(k)s but used in different sectors. 403(b) plans are for public schools, hospitals and certain non-profits. 457(b) plans are for state and local government employees. Both offer tax-deferred growth and similar contribution limits, but 457(b) plans have more flexible early withdrawal rules, particularly for those retiring before 59½.
Individual Retirement Accounts (IRAs)
Traditional IRA
Anyone with earned income can contribute to a Traditional IRA, up to $7,000 per year in 2025, or $8,000 if over age 50. Contributions may be tax-deductible depending on income and whether the person is covered by a workplace retirement plan. Growth is tax-deferred, and withdrawals are taxed as income after age 59½.
If withdrawals are taken earlier, a 10% penalty typically applies unless a qualified exception is met. RMDs also apply from age 73.
Roth IRA
A Roth IRA is funded with after-tax money. The main benefit is tax-free withdrawals in retirement. Contributions are not tax-deductible, but qualified withdrawals — including both contributions and earnings — are entirely tax-free after age 59½, as long as the account has been open for at least five years.
There are income limits to contribute directly to a Roth IRA. In 2025, phase-outs begin at $146,000 for single filers and $230,000 for married couples filing jointly.
Roth IRAs do not have RMDs during the owner’s lifetime, which makes them useful for estate planning or flexible drawdown strategies.
Backdoor Roth
High-income earners who are above the Roth IRA income limits sometimes use a strategy called a Backdoor Roth IRA. This involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. The IRS allows this, but it comes with tax implications depending on existing IRA balances and the pro-rata rule.
SEP IRA and SIMPLE IRA
For self-employed individuals or small business owners, other account types offer higher contribution limits or easier setup.
SEP IRA
A Simplified Employee Pension (SEP) IRA allows employers — including self-employed individuals — to contribute up to 25% of compensation or $69,000 in 2025, whichever is lower. It’s easy to set up and has low administrative overhead.
Only the employer contributes, and contributions are tax-deductible. Withdrawals are taxed like any other traditional retirement account, and early withdrawals face penalties.
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is for businesses with 100 or fewer employees. Employees can contribute up to $16,000 in 2025, with a $3,500 catch-up contribution for those over 50. Employers must either match contributions up to 3% or make a 2% non-elective contribution for all eligible employees.
SIMPLE IRAs have stricter withdrawal penalties in the first two years and fewer investment choices than a 401(k), but lower setup and maintenance costs.
Health Savings Account (HSA) — a hybrid option
While not a retirement account in the strict sense, a Health Savings Account offers triple tax benefits: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.
After age 65, withdrawals for non-medical expenses are taxed as income — similar to a traditional IRA. That makes the HSA a stealth retirement account for those with low healthcare spending and high income. Contribution limits for 2025 are $4,150 for individuals and $8,300 for families, with a $1,000 catch-up for those 55 or older.
Social Security — not an account, but essential
Social Security is a government program that provides a basic retirement income based on your earnings record. It is not a savings account, but it forms a key part of retirement planning. The amount you receive depends on your top 35 years of earnings, your age at retirement, and your work history.
You can start receiving benefits at 62, but doing so reduces your monthly payout. Full retirement age is between 66 and 67 depending on birth year, and delaying benefits until age 70 increases your monthly income.
Combining account types
Most people use several retirement accounts throughout their working lives — often a workplace 401(k) combined with a Roth IRA, or a SEP IRA if self-employed. The combination of tax-deferred and tax-free accounts gives more control in retirement. You can draw from different sources to minimise tax exposure, keep income within certain thresholds, or manage RMDs more efficiently.
Seen from Pension Gruber
Guests visiting from the U.S. often talk about the complexity of their retirement system — especially those juggling multiple accounts from different jobs. Some arrive well-prepared, using Roth IRAs and HSAs to keep taxes low. Others rely solely on Social Security and express regret over missing employer matches or not understanding contribution limits when they mattered.
The accounts are there. The challenge is using them deliberately. The system doesn’t punish people who start early and stay consistent — but it does leave little margin for error if you ignore it.
