Social Security and a pension pay a check for life. For most Americans, though, a large part of retirement income will come from money they saved themselves. That money usually sits in one of a handful of accounts with tax breaks attached: a 401(k), a 403(b), a 457(b) or an IRA. The names sound technical, but they all work on the same basic idea.
The basic idea
You put money in while you work. It is invested, usually in mutual funds or target-date funds. As long as it stays in the account, you pay no tax on the growth each year. You pay tax either when you put the money in or when you take it out, depending on whether the account is traditional or Roth.
That tax shelter is the whole point. A dollar that grows for 30 years without being taxed every year ends up much larger than the same dollar in a regular brokerage account.
Which account is which
| Account | Who offers it | Typical workers |
|---|---|---|
| 401(k) | Private employers | Most company jobs |
| 403(b) | Schools, hospitals, nonprofits | Teachers, nurses, nonprofit staff |
| 457(b) | State and local governments | Police, firefighters, city and state workers, many teachers |
| IRA | You open it yourself at a bank or brokerage | Anyone with earned income |
The 401(k), 403(b) and 457(b) are workplace plans. Your employer picks the investment menu and takes the money straight from your paycheck. An IRA is a personal account. You choose where to open it and what to invest in.
Many public employees can use two workplace plans at once. A teacher with both a 403(b) and a 457(b) can put the full limit into each, which doubles what they can save. Our 403(b) vs 457(b) guide explains the differences.
How much you can put in for 2026
| Limit | 2026 amount |
|---|---|
| 401(k), 403(b) or 457(b), your own contributions | $24,500 |
| Extra catch-up at age 50 and older | $8,000 |
| Bigger catch-up at ages 60 to 63 | $11,250 instead of $8,000 |
| IRA | $7,500 |
| IRA catch-up at 50 and older | $1,100 |
Starting in 2026, workers who earned more than $150,000 in Social Security wages the year before must make their catch-up contributions as Roth money. Everyone else can still choose.
Traditional or Roth
This is the choice people find most confusing, and it comes down to one question: do you want to pay the tax now or later?
With a traditional account, the money goes in before income tax. Your taxable pay drops today, and you pay tax on every dollar you take out in retirement.
With a Roth account, the money goes in after tax. You get no break today, but the money and all its growth come out tax-free in retirement, as long as you are 59½ or older and the account has been open at least five years.
Here is a simple example. Linda earns $60,000 and puts $5,000 a year into her 403(b). If she uses the traditional option and is in the 12% bracket, she saves about $600 in federal tax this year. If she uses the Roth option, she pays that $600 now, but decades later every dollar she withdraws is hers to keep.
A common rule of thumb: Roth makes more sense when your tax rate today is low, early in a career, for example. Traditional makes more sense in your highest-earning years, when the deduction is worth more. Many people split their savings between the two so they have both kinds of money to draw from later.
IRAs have income limits for Roth contributions. Workplace Roth options do not.
The employer match
Many private employers add money to your 401(k) when you contribute. A common formula is 50 cents for every dollar you put in, up to 6% of your pay. On a $60,000 salary, that means if you put in $3,600, the company adds $1,800. That is an instant 50% return before any investment growth.
If your employer offers a match, contributing at least enough to get all of it is one of the best money moves available. Public employers rarely match 403(b) or 457(b) savings, because the pension is their main retirement benefit.
Vesting
Your own contributions are always 100% yours. Employer money may vest over time, often over three to six years. If you leave before you are fully vested, you lose the unvested part of the match.
What to do with an old account when you change jobs
You have four choices:
- Leave it in the old plan, if the balance is large enough that they allow it.
- Roll it into your new employer’s plan.
- Roll it into an IRA, which usually gives you more investment choices.
- Cash it out, which is almost always the worst choice. You pay income tax, often a 10% penalty if you are under 59½, and you lose years of tax-free growth.
A direct rollover, where the money moves straight from one account to the other, keeps it all tax-free.
Common questions
Can I have a 401(k) and an IRA at the same time? Yes. You can contribute to both in the same year. If you have a workplace plan, the tax deduction for a traditional IRA phases out at higher incomes, but you can still contribute.
What if I need the money early? Withdrawals before 59½ usually carry a 10% penalty on top of income tax. There are exceptions. One of the most useful: if you leave a job in or after the year you turn 55, you can take money from that employer’s 401(k) or 403(b) without the penalty. A 457(b) has no early-withdrawal penalty at all once you leave the job.
How much should I save? A common target is 10% to 15% of pay, counting any employer match. Public employees with a pension and Social Security can often reach a comfortable retirement with less. Our retirement planner puts your pension, Social Security and savings on one chart so you can see the gap, if there is one.
When do I have to start taking money out? Traditional accounts require minimum withdrawals starting at 73 for people born from 1951 to 1959, and 75 for people born in 1960 or later. Roth IRAs have no required withdrawals during your lifetime. The RMD calculator shows what you would have to take each year.