Top 3 Retirement Accounts You Should Know About

 3 Retirement Accounts You Should Be Familiar With

Okay, so for something that’s not the most exciting thing in the world, but is yet excruciatingly important—retirement accounts. I know, I know. It’s easy to postpone any retirement planning, especially when retirement seems like light-years away. But believe me, the more you can come to terms with this stuff now, the smoother your life will be later. So come grab a coffee, make yourself comfortable and let’s define the top 3 retirement accounts you should be aware of.

1. 401(k): The Best Friend Of Your Employer (And You Too!)

If you have a job that provides a 401(k), then you are lucky! This is one of the more common retirement accounts, and for good reason—it comes with some serious perks. A 401(k) is a retirement account that’s sponsored by your employer, and the best part? You can also make before-tax contributions directly from your paycheck. That means you don’t pay taxes on the money you put in up front, which can help lower your taxable income for the year.

But wait, there’s more! Many employers will make a matching contribution. So say, for example, your company matches up to 4% of your salary. Which means when you invest 4%, your employer will match you with another 4%—essentially free money. Come on, who doesn’t love free money, right?

I didn’t even know what a 401(k) was when I first started working. It took a friend to explain it to me, and then I was like, “Wait, just that they’ll match my contribution?” I couldn’t believe it. Seemed like a no-brainer, so I signed up at once. Sure, I didn’t know the exact amount I would need for retirement back then, but the free match was enough to get me to start contributing.

One thing to know about a 401(k) — you typically can’t touch the money until you’re about 59 and a half without penalties (unless you meet certain exceptions). So, it’s not for access on-the-go, but a good account for growing it for the long haul.

2. IRA (Individual Retirement Account) – The Key Is Flexibility

If you don’t have a 401(k) or you simply want to save more for retirement, an I.R.A. might be a good option. An IRA is another kind of retirement account, but unlike a 401(k), it’s not connected to your job. Alternatively, you can open an IRA yourself; banks, investment firms and online brokers all offer them. There are two primary types: Traditional IRAs and Roth IRAs, and here’s how they differ:

Traditional IRA**: With a Traditional IRA, your contribution is generally tax-deductible (based on your income and whether you're covered by a 401(k) at your job). That means that if you put, say, $5,000 in your IRA, your taxable income for that year drops by $5,000. The catch? You’ll pay taxes on it when you withdraw the money in retirement.

Roth IRA**: The Roth IRA is slightly different. With a Roth IRA, you don’t receive a tax deduction today on the money you contribute, but your money grows tax-free, and when you retire, you can take it out tax-free. Yep, you read that correctly — tax-free withdrawals in retirement. That’s why many people are fond of Roth IRAs, especially if you anticipate you will be subjected to a higher tax bracket when you retire.

I personally like the idea of a Roth IRA because taxes, let’s be honest, are only going to go up, right? I’d much prefer to pay them now while my income is low than to wait until I’m retired and making an income off all that growth in my investments. It’s like it is the best of both worlds.

“IRA accounts are really flexible in terms of where you can invest the account,” New said. You’re limited to stocks, bonds, mutual funds, or if you really want to take a leap of faith, real estate. It means that you can customize your investments according to your own goals and risk tolerance.

3. SEP IRA – For the Solo Artist

If you are self-employed or running a small business, a SEP IRA (Simplified Employee Pension) may be the answer. One thing about the SEP IRA is that, like a Traditional IRA, when it comes to your taxes, you can deduct your contributions. But here’s where it gets exciting: As a small-business owner or self-employed individual, you can sock away a far greater percentage of your earned income into a SEP IRA than you could into a traditional IRA.

In actuality, for 2025, contribution limits max out at the lower of $66,000 or 25% of your net earnings. So if you have a high income, you can save thick out of it for retirement and reduce taxes at the same time. That’s pretty awesome, right?

I have a couple of self-employed friends who swear by their SEP IRAs. One of them is a self-employed graphic designer, and with her relatively high income, she has been able to contribute a substantial portion of her income into her SEP IRA each year. Just the tax savings make it worthwhile for her. Plus, she enjoys having more control over her retirement accounts than she would have with an employer-based plan.

A couple of things to know about a SEP IRA: As the business owner, you'll have to contribute the same amount for all eligible employees. If you contribute a quarter of your income, you must also contribute a quarter for your employees. But that’s not a bad problem to have if you’ve got a successful business and have people working for you.

Why These Accounts Matter

So, now you know about the top three retirement accounts — 401(k)s, IRAs (Traditional and Roth), and SEP IRAs. Your immediate response might be “What is the big deal? I don’t want to think about retirement yet!” I understand — pondering retirement in your 20s or 30s feels like considering the finale to an excellent film before it even begins. But believe me, the sooner you begin, the easier it will be to kick back and relax when you are older.

Here is one excellent way to start early: Instead of putting your money under your mattress or in a regular ol’ bank account, you could open up any of these accounts and let the power of compound interest and tax advantages help your money grow. And it doesn’t require you to have a lot of cash up front. Every little bit adds up.

So, choose the account that feels most appropriate for you. Whether you have a 401(k) at work, are self-employed and need a SEP IRA, or simply want the flexibility of an IRA, starting today is the best thing you can do for your future self. Your future self will appreciate it. Believe me, it’s an investment in yourself and there’s nothing more precious than that.

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