Retirement 101: Understanding 4 key types of retirement accounts

When it comes to retirement planning, it’s important to make informed decisions now to successfully prepare for the future you've imagined. Wherever you are on life’s journey—beginning your career, starting a family, or retirement is around the corner, understanding the different account types is crucial, each offers unique benefits, tax advantages, and regulations, making some more suitable for your retirement goals than others. Explore the highlights and features of the 4 most common retirement plans:

1. 401(k) Plans

Over 72.21 million Americans participate in 401(k) plans, making it among the most popular retirement plans.

401(k) plans are employer-sponsored retirement savings plans that allow employees to save and invest a portion of their paycheck before taxes are taken out. Taxes on 401(k) contributions and earnings are deferred until the money is withdrawn, typically in retirement. Some employers match their employees' contributions to a 401(k), typically up to a certain percentage. However, you might not be fully "vested"(ownership of the employer contributed funds) in your plan for several years.

Account variations:

• Some employers offer a Roth 401(k) option, which is the opposite of a traditional 401k. Contributions are made after-taxes so no tax is paid during retirement.
• 403(b), a similar retirement plan offered to educators (e.g., in public schools), clergy, and workers at 501(c)-3 tax-exempt organizations;457(b) plans, offered to state or local government employees.

Keep in Mind: If you withdraw funds from the plan before age 59 1/2, however, you could pay a 10% penalty, and the withdrawal would be subject to federal and state income taxes. Some plans allow 401(k) loans if you find yourself in a cash emergency and meet certain qualifications.

2. Traditional IRA (Individual Retirement Account)

Another popular retirement plan is an IRA (Individual Retirement Account). There are many types of IRAs each with its own set of specific rules and benefits. A traditional IRA allows you to grow your retirement savings with a major tax advantage. In most cases, you can deduct the amount you contributed to your IRA from that year's tax return. For example, if you deposit $3,000, you can report $3,000 less income on your tax return, which will likely lower the amount of taxes you owe.

You can open an IRA account at a bank, brokerage firm, mutual fund company, insurance company, or at a number of other types of financial institutions. Your account will be managed by a broker or another agent of the firm who will invest your money for you in CDs, bonds, mutual funds, stocks, and almost any other type of asset on the market. What’s more, you can contribute to your IRA, even if you have a 401(k) or 403(b) plan if you have earned income for a job or are self-employed.

Keep in mind: One potential downside to traditional IRAs is that once you draw on the funds during retirement, you will have to pay taxes on that money. You also will usually incur a penalty if you withdraw from the account before age 59½.

3. Roth IRA

A Roth IRA is a smart option for individuals who want to pay taxes now and potentially not have to pay taxes later. For individuals who might expect income (and tax rate) to increase over time, contributing now means they will pay a lower tax rate upfront and no taxes on qualified withdrawals in retirement.

You can withdraw contributions you've made to a Roth IRA before retirement age without penalty, provided five years have passed since your first contribution. You're not currently required to begin taking withdrawals at age 72, as you are with traditional IRAs, 401(k)s, and other retirement savings plans.

Like traditional IRAs, you can contribute to a Roth IRA even when you have a workplace 401(k) or 403(b) plan, or if you have earned income from a job or self-employment. The IRS does set an income limit to be eligible to contribute to a Roth IRA.

Keep in mind: Are Roth IRAs insured? Roth IRAs that aren’t held at a bank do not have FDIC insurance. Instead, assets in your brokerage account are protected by SIPC insurance which, among other protections, offers up to $500,000 in protection for your Roth IRA if your broker fails financially and assets are missing.

4. SEP IRA

A SEP IRA is a retirement plan designed for self-employed people and small business owners. Formally known as a Simplified Employee Pension, this type of plan lets entrepreneurs establish and contribute to individual retirement accounts for themselves and their employees.

Almost any type of business is eligible to establish a SEP IRA, from self-employed individuals to multi-person corporations (including sole proprietors, partnerships, S and C corporations, and limited liability companies (LLCs), tax-exempt organizations, and government agencies.

Keep in mind: Employer contributions are tax-deductible. And earnings grow tax-deferred and are not taxed until they are withdrawn.