Retirement

Retirement Planning: The Best Tools to Save for Your Future

Dayana Yochim

Written by Dayana Yochim
Edited by Carolyn Kimball
Fact-checked by Andrea Coombes

December 21, 2022

It may sound obvious, but the best way to save for retirement is in a retirement savings account. Then there are the follow-up questions: What kind of account? How much should you (can you) contribute? How do the taxes work? What are the benefits and drawbacks of IRAs and 401(k)s and Roths? Most importantly, which is the best retirement savings account for me?

We got this. The investor.com retirement savings series is designed to answer your most pressing questions about choosing and using retirement accounts like IRAs and 401(k)s. This article spells out what makes retirement accounts different from other types of savings accounts, and offers a bird’s-eye view of the account options we delve into within this series.

What is a retirement account?

A retirement account — or retirement plan — has special features that make it easier to grow your nest egg for the future. The main thing that differentiates retirement accounts from other types of savings and investment accounts is taxes.

The main thing that differentiates retirement accounts from other types of savings and investment accounts is taxes.

A retirement account shelters your money from the IRS, at least for a while. Depending on the account type you choose, you’re rewarded with either an upfront tax break or a pass on paying taxes when you start making withdrawals later on.

On top of that, money in a retirement account enjoys protected status from the IRS, leaving your investments to grow free from being taxed. It’s basically a legal version of an offshore account — a government-sanctioned domestic tax haven.

Sadly, you can’t escape Uncle Sam’s reach forever. The IRS is pretty adamant about collecting income taxes. But whether you pay your bill before money goes into the account or after you take it out is based on which account type you choose. Here, the choice boils down to traditional accounts — such as traditional IRA, 401(k)s, 403(b)s, SEP IRAs — and Roth accounts, like Roth IRAs and Roth 401(k)s.

investor.com Quick Tip: 25 words on how Roth and traditional retirement accounts differ


The main difference between Roth and traditional IRAs and 401(k)s is how contributions (the money you put into the account) and distributions (withdrawals) are taxed.


For lots more words on the topic — including how to choose the best IRA type for your needs — see our Roth vs. Traditional IRA explainer.

A popular misconception is that a retirement account is, itself, an investment. It’s not. It’s an investment vehicle — a mode of transportation to get to retirement that puts you in the driver’s seat. Once you’re buckled in, you’ll notice that the account features make it particularly suitable for long-haul trips like investing for retirement. But before stepping on the accelerator, you have some decisions to make.

A popular misconception is that a retirement account is, itself, an investment. It’s not. It’s an investment vehicle — a mode of transportation to get to retirement that puts you in the driver’s seat.

We'll continue the road trip analogy until our editors tap the brakes on it: To prepare for your journey, you pick a retirement account make and model (say, Roth IRA), fill it up with gas (money), and set your destination (the future). Deciding what to pack in the trunk is next. Instead of clothes and too many shoes (just me?), you’re using your cash to choose investments (stocks, bonds, mutual funds, etc.) to fuel your trip.

Along the way you may adjust your plans by adding or discarding items from your suitcase of investments to get the best mileage on your money. [Editor’s note: Aaaaand, I think this analogy has run its course, OK?]

Here’s a side-by-side comparison of the basic differences between retirement, investment and savings accounts:

Features Retirement account Investment account Savings account
Available investments within account Stocks, bonds, mutual funds, ETFs, etc. Stocks, bonds, mutual funds, ETFs, etc. Cash, money market funds
Growth potential Based on investment returns Based on investment returns Limited by APY offered by bank
Offers a tax break on contributions or withdrawals Yes No No
IRS limits on contributions Yes (based on account type) No (though capital gains rates are lower than income tax rates) No
Gains within account subject to annual taxes No Yes, when an asset is sold Yes
Penalties for early withdrawals (before age 59 ½) Maybe (some types of accounts allow penalty-free early withdrawals) No (though gains are taxable) No
Requires minimum annual withdrawals after you turn 72 Maybe (depends on the type of account) No No
Best used for Money you don’t plan to spend before age 59½ Long-term savings (5+ years, depending on your risk tolerance) Money you plan to spend in the next 0-5 years

As you can see, a regular savings account simply doesn’t offer the same useful features (tax breaks, access to growth investments) that you get in a retirement account. A non-retirement investment account is great in a pinch (especially if you want to invest even more money than the IRS allows in a retirement account). But whenever possible, the default account for your retirement savings should be a retirement account.

Types of retirement accounts

There are retirement plans designed for all types of people, from employees of big companies to the self-employed; nonworking spouses to nonprofit workers. There are retirement accounts for people who want an immediate tax break and other types for those seeking tax relief down the road.

What all retirement accounts have in common is that they provide a hard candy shell that protects your savings from being eaten by taxes. As we pointed out earlier, you pay no taxes on investment growth while your money is in the account. (This is the IRS tax dodge we referenced above.) And, depending on which type of retirement account you choose, you may not owe any taxes on withdrawals.

There are three main types of tax-advantaged retirement savings accounts:

  • Individual retirement accounts (IRAs): Anyone with earned income (or who files jointly with someone who has earned income) can contribute money to an IRA to save for retirement. It simply involves setting up an account at a financial services firm (we recommend doing it at a brokerage instead of a bank), and picking your investments from the wide array offered. There are different types of IRAs from which to choose, depending on your tax filing status and other factors. (See What is an IRA? Pros and cons.)
  • Workplace retirement plans: The two main types of workplace retirement accounts are defined benefit plans and defined contribution plans. Defined benefit plans are typically funded by the employer and pay income to workers in retirement. Think old-school pensions. Defined contribution plans — aka employer-sponsored retirement plans such as 401(k)s, 403(b)s and 457(b)s — are the more common offering these days. These are retirement accounts set up by an employer to allow employees to automatically divert a portion of each paycheck into the savings plan. They offer a preset selection of investments to choose from. Many employers match a portion of employee contributions as an incentive to save. (See What is a 401(k)? Pros and cons.)
  • Self-employed/small-business plans: Those who work for themselves or own a small business have a unique array of retirement accounts available to them, including SEP IRAs and Solo 401(k)s (also called Solo-ks). Some of these plans allow individuals to contribute a significant amount of money to a tax-advantaged account, as well as provide retirement savings perks to any employees.

There are other types of retirement plans — like Thrift Savings Plans (TSPs) for military and government workers, and nonqualified deferred compensation plans (NQDCs), a perk for C-Suite execs — but we’ll tackle the most common retirement account types in this Guide.

In addition to protection from taxes, the other thing all retirement accounts have in common is that the IRS has rules — so, so very many rules — about how much you can contribute each year, when you’re allowed to (or required to) pull money out, and whether you’ll owe taxes on that amount.

The previous sentence would be lit up like a Christmas tree if we included IRS.gov links for every item.

Do not be intimidated by the mountain IRS tax code required to cover every last retirement account rule in existence. Instead, cheat off our homework and, for extra credit, take a peek at the source material, strategically linked in each article in this series. (If you decide you’d like guidance from a financial pro, here’s how to find a fee-only fiduciary financial advisor — the only type we recommend.)

Next steps

And now, check out the next stories in our series to get all of your retirement plan questions answered.

5 Questions to Help You Choose the Best Retirement Plan: Any tax-advantaged retirement account is a worthy vessel for your savings. But we came up with five key questions to help you pick the best plan for your unique financial situation.

What Is an IRA? Pros and Cons: IRAs (individual retirement accounts) are the most widely available retirement account option, are not tied to an employer and available in a variety of flavors. This article covers how they work and gives a rundown of key contribution, withdrawal and other rules.

What Is a 401(k)? Pros and Cons: This workplace retirement plan is a staple across corporate America. Similar plans are 403(b)s and 457s. There are rules that are universal to all employer-sponsored retirement plans. We go over those, as well as the optional features (some great, some not) that may be unique to your company’s plan.

IRA vs. 401(k): The Best Ways to Use Each Account: You’re allowed to save in both an IRA and a 401(k) at the same time. But it’s good to go in with a savings strategy. In this article we pit each account type against the other and provide an action plan on when to use which type.

Comparing Roth IRA vs. Traditional IRA: It’s all about taxes. And eligibility. And, well, a bunch of other stuff too. Let’s take a tour through the similarities and differences between the two popular IRA types and figure out which one (or both!) best suits your needs now and in the future.

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5 Questions to Help You Choose the Best Retirement Plan

About the Editorial Team

Dayana Yochim
Dayana Yochim

Dayana Yochim has been writing (articles, books, podcasts, stirring speeches) about personal finance and investing for more than two decades, focusing on bringing clarity and the occasional comedic aside to what is often a murky, humorless topic. She’s written for NerdWallet, The Motley Fool, HerMoney.com, Woman’s Day, Forbes, Newsweek and others, and been a guest expert on "Today," "Good Morning America," CNN, NPR and wherever they’ll hand her a mic.


Carolyn Kimball
Carolyn Kimball

Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money


Andrea Coombes
Andrea Coombes

Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point.


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