Different Types of Retirement Accounts

Individual Retirement Accounts (IRAs), 401(k) and 403(b) accounts. What are the differences among different types of retirement accounts?

Who qualifies for the different types of retirement accounts?

One key difference among different types of retirement accounts is which one is available to you. 401(k) accounts are generally set up by for-profit companies, while 403(b) accounts may be offered by non-profit and government employers.

IRAs are usually thought of as self-established, though there are several ways an employer might set up IRAs for employees. Among those: SIMPLE and SEP IRAs. They are set up by employers but the individual accounts look very much like traditional IRAs.

There are any number of other different types of retirement accounts. Not all of the others qualify for the same favorable tax treatment. And some workers may be eligible for more than one type of account. Finally, of course, a given worker might have a retirement account from a former employer, and therefore have two (or three, or more) different types of retirement accounts.

All of those listed above are “defined contribution” plans. That is, the value and the ultimate payout are determined by the amount contributed and the market forces after investment. There are a whole variety of “defined benefit” plans – they offer benefits based on years of work experience and age of the worker. Defined benefit plans are what most people think of when they hear the word “pension.” These plans are less common today than they had been in earlier decades, though about one in seven workers are still covered by this type of retirement plan.

How are they managed?

Some retirement accounts might be managed by the employer. Others might be out-sourced to a financial entity. Still others might be managed by the individual beneficiary, who can make investment decisions (or hire a financial organization to make decisions for them). Federal rules control how long you have to work before being covered by your employer’s plan. And individual plan managers vary widely.

One of the key concerns for policy makers is how widely workers participate in their retirement plans. Even in the defined-benefit arena, for instance, actual coverage is noticeably lower than the availability of the plans. In 403(b) plans, participation is as low as 80% of eligible workers. But with workers eligible to participate in a 401(k) plan, participation is actually much lower — only about two-thirds of private industry workers even have access to a 401(k) plan, and only about three-quarters of those sign up. That’s one of the key issues addressed in recent federal law changes known as “SECURE 2.0”. Automatic enrollment in the available types of retirement accounts is now favored. Experts hope that participation rates will increase as a result.

The good news: plan participation is trending upwards. The less-good news: even workers very near retirement age (“Baby Boomers,” for instance) have an average of less than $250,000 in retirement savings. The account balances for those in their prime work years are less than $75,000 for “Millenials” and less than $200,000 for “Gen-X”ers.

What are the differences for existing accounts?

But for us — estate planners — the most important differences among different types of retirement accounts are not about setting them up. The important differences are in how distributions are made.

Generally, all the various types of retirement accounts are subject to the same distribution rules. Beginning in the year you turn 73, you have to start taking out annual distributions. Actually, you have to begin taking distributions by April 1 of the next year — but if you wait you will be doubled-up and have to take two years’ worth of distributions in that same year. All of them allow you to make penalty-free withdrawals after you turn 59 1/2. When you die, all of them have similar rules about how your beneficiaries have to take out the funds.

But there are a number of significant differences between the various account types. Key among them are these three:

1. Required minimum distributions for IRAs can be made directly to charitable beneficiaries and not show up as income on your own income tax return. For most people, this is better than withdrawing the money and then giving it to charity — your charitable deduction may not be worth anything if you don’t itemize on your income tax return. Using the “Qualified Charitable Distribution” you keep the income from ever showing up on your return in the first place. But this is not available for 401(k) or 403(b) holders.
2. Still working after age 73? You don’t have to take distributions from your 401(k) if you meet basic requirements. But this option is not available for either IRA or 403(b) owners. The key requirement for a 401(k) owner: they can’t own more than 5% of the employer’s business.
3. OK — this one is about contributions rather than distributions. But for someone still working, and for older workers especially, the contribution limits are important. For 2025, a 401(k) or 403(b) participant can contribute up to $23,000 (plus another $7,500 for those over age 50). For IRA holders, the contribution limits are $7,000 for most workers, and an additional $1,000 for those over age 50.

So which type of retirement account is better?

The choice of retirement account depends more on your employer and available options — at least for most people. But it is also possible to transfer funds among different account types in many cases. In general, most workers will find their 401(k) plan more flexible and the employer’s contributions very attractive. But even someone covered by a 401(k) plan might benefit from having an IRA account — even if it has to be a non-deductible IRA. And that’s a different story.