- Retirement Accounts Guide: The Best Tools to Save
- What Is a Retirement Account?
- What Is the Best Investment for Retirement?
- 5 Questions to Help You Choose the Best Retirement Plan
- What Is an IRA? Pros and Cons
- What Is a 401(k)? Pros and Cons
- IRA vs. 401(k): The Best Way to Use Each Account
- Comparing Roth IRA vs. Traditional IRA
- How Do I Open a Roth IRA?
- How Much Does It Cost to Open an IRA?
- Can I Roll Over my 401(k) to a Roth IRA?
What Is a Retirement Account?
Written by Andrea Coombes
Fact-checked by Dayana Yochim
Edited by Carolyn Kimball
March 01, 2024
A retirement account has special features that make it easier to grow your savings for the future. And by “special features,” we mean tax benefits. The main thing that differentiates retirement accounts from other types of savings and investment accounts is taxes.
Quick take: The reason you hear a lot about retirement accounts such as 401(k)s and IRAs is that they give a big tax break to help you save for retirement. Depending on the account type, you’re rewarded with either an upfront tax break or tax-free withdrawals later on. And with all retirement accounts, you don’t pay any taxes while your money is sitting in the account.
Tell me more! Let’s dive into those tax breaks:
If you choose an account that offers an upfront tax break, like a 401(k) or traditional IRA, that means you don’t have to pay any income tax on the money you contribute to that account in the year you make the contribution. That tax savings is like extra money you find under the couch cushions: It can help you buy more things, and by “buy more” we mean “save more.” Plus, you don’t have to worry about taxes at all while your money is in the account. (Once you start taking withdrawals after you retire, then the IRS is gonna come knocking.)
If you choose a Roth account, such as a Roth 401(k) or Roth IRA, then you don’t get that upfront tax break but you do get something at least as sweet: No taxes when you take the money out in retirement. That means your money grows totally tax-free and you will not be hearing from the IRS when you start taking retirement withdrawals.
Still wondering if a retirement account is right for you? 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 (though capital gains rates are lower than income tax rates) | No | IRS limits on contributions | Yes (based on account type) | No | No | Investment gains | 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 |
Bottom line: Saving for retirement is great. Investing for retirement is better. And investing for retirement with some help from the IRS? Priceless. If you’ve got a 401(k) or other workplace retirement plan, be sure to invest in that to secure any company match. If your company doesn’t offer a match, then open an IRA.
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About the Editorial Team
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.
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 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.
