Planning for retirement might not be the most exciting topic, but trust me—your future self will thank you for taking it seriously. There are several types of accounts designed to help you build that all-important nest egg, each with its own perks and quirks. In this guide, we’ll break down four common retirement accounts—401(k), 403(b), IRA, and TSP—so you can make smart moves for your financial future.

Think of a 401(k) as your workplace-sponsored retirement sidekick. Offered by private-sector employers, this plan lets you contribute pre-tax income, meaning you get a break on your taxable income now. And if your employer offers matching contributions? That’s free money—don’t leave it on the table!

Pros:

• Employer matching contributions (if offered)

• High annual contribution limits ($23,000 for 2024, with a $7,500 catch-up for those 50 and older)

• Tax-advantaged growth

Cons:

• Withdrawals before age 59½ incur a 10% penalty and are subject to income tax

• On traditional 401(k)s, Required Minimum Distributions (RMDs) start at age 73

• Limited investment choices depending on your employer’s plan

A close cousin to the 401(k), the 403(b) is designed for employees of public schools, nonprofits, and tax-exempt organizations. It works much the same way, with tax-advantaged growth and high contribution limits.

Pros:

• Employer contributions may be available

• Tax-advantaged growth with high contribution limits

• Some 403(b) plans have lower fees due to exemptions from ERISA regulations

Cons:

• Limited investment options (typically mutual funds and annuities)

• Early withdrawal penalties before age 59½

• RMDs apply at age 73 on traditional 403(b)s

IRAs are for those who want a retirement savings option outside of an employer-sponsored plan. There are two main types: Traditional and Roth.

Traditional IRA

Pros:

• Contributions may be tax-deductible, reducing taxable income

• Tax-deferred growth

• Wide range of investment options

• Accessible to most individuals with earned income

Cons:

• RMDs start at age 73

• Early withdrawals may incur penalties

• Deductibility may be limited if you have a workplace retirement plan

• Income limits for tax deductibility

• Lower contribution limits than 401(k) and 403(b) plans ($7,000 in 2024, with a $1,000 catch-up for those 50 and older)

Roth IRA

Pros:

• Contributions are made with after-tax dollars, so withdrawals in retirement are tax-free

• Tax-free growth

• No RMDs, meaning your money can keep growing tax-free

• Withdrawals of contributions (but not earnings) can be made penalty-free anytime

• Wide range of investment options

• Accessible to most individuals with earned income

Cons:

• Income limits apply for contributions (some exclusions apply)

• No immediate tax benefits

• Lower contribution limits than 401(k) and 403(b) plans ($7,000 in 2024, with a $1,000 catch-up for those 50 and older)

• Low-cost investment options

• Employer matching contributions for federal employees

• High contribution limits (same as 401(k) and 403(b) as of 2024)

Cons:

• Very limited investment choices

• Early withdrawal penalties before age 59½

• RMDs apply to Traditional TSP accounts

So, where should your money go first? Here’s the general strategy:

(some situations require adjustments for optimization)

1. Max out employer matching contributions – This is free money, folks. Always grab it first!

2. Prioritize Roth contributions – A Roth IRA is a great option for most (subject to income limits), or if your employer allows it, Roth 401(k)/403(b)/TSPs allow for tax-free growth and lets you skip RMDs, giving you more control over your income in retirement.

3. Contribute to Traditional accounts – Once you’ve taken full advantage of employer matches and Roth options, a Traditional account gives you tax advantages today, and deferral on taxes for the long term. Just be mindful of your RMDs in the future!