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Summary: Employees seeking retirement plans have many options for employer-funded, shared, and personal plans exist for employees and employers to choose from.
Retirement Plans
Retirement plans are designed to help individuals build financial security for life after work. While Social Security offers some income in retirement, it’s usually not enough to maintain your standard of living. That’s why many people turn to retirement plans, whether offered through an employer or set up independently, to save and invest for the long term. These plans often come with tax benefits that make it easier to grow your savings over time.
What Are Retirement Savings Plans?
Think of retirement savings plans as your financial time machines. They help you send money into the future, where it’s waiting to support the life you want after you stop working. These plans come in all shapes and sizes. Some, like 401(k)s and SIMPLE IRAs, are offered by employers and may even come with matching contributions. Others, like Traditional or Roth IRAs, are savings plans you can open on your own, with flexible options tailored to your lifestyle and goals.
Whether you’re self-employed, working for a nonprofit, or building your future solo, there’s likely a plan that fits your path. The key? Start early, stay consistent, and choose a mix that works for your income and retirement dreams. With the right strategy, your savings can grow quietly in the background, until one day, they become your paycheck in retirement.
Defined Contribution Plans
Defined contribution plans are the most common plans used on the market today. These plans are tax-preferred and help employees save money while their employers can also contribute to their individual accounts.
Different types available include:
401(k) plans
An employee can contribute a part of their salary to a 401(k) plan with pre-tax income. This means that the contributions are not taxed but will be taxed on withdrawal instead. This tax deferral makes a lot of sense for anyone who expects their retirement income to be lower than their current income and, therefore, would put them into a lower tax bracket. These funds can be invested in different vehicles like stocks and bonds, and earnings aren’t taxed until they’re withdrawn. Employers can contribute to these plans and then write off their contributions.
Roth 401 (k) plans use taxed income as contributions so that future disbursements don’t need to be taxed (except for earnings).
401(a) plans
A 401(a) plan is a type of retirement savings plan typically offered by government and nonprofit employers, where the employer sets the terms of the plan, including contribution limits, vesting schedules, and eligibility requirements. Both employer and employee contributions can be made to the plan, but the specifics, such as contribution amounts and withdrawal rules, are determined by the employer, offering less flexibility compared to other retirement plans like a 401(k).
403(b) plans
A 403(b) tax-sheltered annuity plan (TSA) works in much the same way as a 401(k), except it is used in the non-profit sector. This plan can be used for people working for churches, charitable organizations, colleges, or universities. Read more in our 401(k) vs 403(b) guide.
457(b) plans
A 457(b) plan works much like a 401(k), but it’s designed for employees of state and local governments or certain tax-exempt organizations. In 2025, the annual contribution limit is $23,500, with an additional $7,500 catch-up allowed for those aged 50 or older. Some participants aged 60 to 63 may qualify for a higher catch-up limit under the SECURE 2.0 Act. One key benefit? Withdrawals from a 457(b) aren’t subject to the early withdrawal penalty, unlike 401(k)s.
SIMPLE 401(k) plans
A SIMPLE 401(k) is a subset of the 401(k) plan designed for business owners with 100 or fewer employees. With this plan, the business owner must make contributions that match either 3% of each employee’s salary or 2% of their non-elective contributions to the 401(k).
Solo 401(k) plans
A Solo 401(k) is designed for self-employed individuals with no employees. In 2025, you can contribute up to $23,500 as an employee. If you’re 50 or older, you can make an additional $7,500 catch-up contribution. As the employer, you can contribute up to 25% of your compensation, with total combined contributions (employee and employer) capped at $70,000. For those aged 60 to 63, the catch-up contribution limit increases to $11,250, allowing a maximum contribution of $81,250.
Traditional Pension
Once the gold standard of retirement, traditional pensions are becoming increasingly rare in today’s workforce. These plans are fully funded by employers, who promise to pay retired employees a set monthly amount, usually based on a formula that considers the worker’s salary and years of service. In short, the longer you stay with the company, the bigger your guaranteed payout in retirement.
While pensions offer stability and predictability, they’ve become tough for many employers to sustain over time. Rising costs and long-term financial obligations have led many companies to phase out pension plans in favor of more flexible options like 401(k)s, which shift the savings responsibility from the employer to the employee.
Cash-balance pension plans
A cash-balance plan is similar to a traditional pension. It’s employer-funded and based on a percentage of the employee’s salary and a set investment credit. This amount is promised so the employee knows how much they’ll receive from the employer. The employer invests some of these funds and may see better or worse returns than promised. If they’re worse, the employer still pays the difference to make the promised cash balance. If the investments perform better than expected, however, the employer still pays the promised contributions and can keep some of the profit from investment returns.
Individual Retirement Arrangements
If you earn taxable income, you can contribute to an Individual Retirement Arrangement (IRA) – a personal retirement savings account that offers tax advantages to help you build a nest egg for the future.
For 2025, the annual contribution limits remain unchanged from the previous year:
- Under age 50: You can contribute up to $7,000 across all your traditional and Roth IRAs.
- Age 50 or older: You’re eligible for a $1,000 catch-up contribution, bringing your total limit to $8,000.
These contributions cannot exceed your taxable compensation for the year.
There are different types of IRAs, including:
Traditional IRA
Contributions made into a traditional IRA are tax-deductible. They can also be invested in vehicles like mutual funds, and any earnings made from these investments are tax-deferred. When they retire, the owners of IRAs pay tax on their disbursements.
Roth IRA
A Roth IRA is different in that contributions are not tax-deductible. However, as long as requirements are satisfied, qualified disbursements are not taxed. Roth IRA funds can be invested and can also be withdrawn at any time without being taxed.
Payroll deduction IRA
This is an IRA set up by an employer and employees make contributions directly to their IRA through salary deductions.
Spousal IRA
This is an IRA that can be set up by a non-working spouse of a worker with taxable income. Even though the spouse doesn’t work, they can still own an IRA, and the working spouse can contribute to it as long as the contributions are less than their working income.
SEP-IRA
A simplified employee pension IRA allows employers to set up IRAs for their employees and make contributions to them. These can even be created by self-employed persons for their own retirement savings.
Guaranteed Income Annuities (GIAs)
A guaranteed income annuity is a plan an individual can invest in personally as they’re not normally provided by employers. An annuity is a lump-sum payment, such as they’d make with an insurer, that is returned as a series of regular payments. If a person receives a lump sum on retirement, they could use this to buy a GIA that will pay them back regularly over time and provide them with income from investment as well. Return rates are usually lower than what could be made on the stock market but are guaranteed. Also, the GIA is paid for life, so the longer a person lives, the more they can make from their initial investment.
The Federal Thrift Savings Plan
The Federal Thrift Savings Plan (TSP) is the government’s answer to the 401(k), designed specifically for federal employees and members of the uniformed services. Like a 401(k), it allows participants to make tax-deferred contributions toward retirement, but with a few unique features.
Here’s how it works: The federal government kicks in an automatic 1% of your basic pay, no matter what. Then, it matches dollar for dollar on the next 3% you contribute and 50 cents on the dollar for the next 2%, up to a total match of 5%. That’s a solid boost to your retirement savings just for participating.
TSP participants can choose from a selection of low-cost investment funds, making it one of the most affordable retirement plans out there in terms of fees. With its simplicity, generous employer match, and minimal overhead, the TSP is a powerful benefit for public service workers planning for the future.
Cash-Value Life Insurance Plan
At first glance, a cash-value life insurance plan might not sound like a retirement strategy, but it can play a surprising supporting role. These are permanent life insurance policies that build value over time while covering you for life. When you pass away, the death benefit goes to your chosen beneficiary. But during your lifetime, the “cash value” portion grows tax-deferred and can be accessed if needed.
While contributions to these plans aren’t tax-deductible, the accumulated cash can typically be withdrawn tax-free, since it’s treated as a return of premium. That flexibility makes cash-value life insurance a potential backup source of retirement income or an emergency fund later in life.
Used wisely, it can be a smart supplement to a 401(k), IRA, or other retirement savings plan, especially for those looking to diversify their retirement portfolio with a mix of protection and accessible savings.
Nonqualified Deferred Compensation Plans (NQDC)
A nonqualified deferred compensation plan (NQDC) is normally only offered to top executives. It can be completely employer-funded, or employee contributions can be matched by employers. The employee’s savings are tax-deferred. However, the employer’s contributions are simply promised and not reserved, so they risk being taken by creditors if necessary.
Choosing the Right Retirement Plan for You
With so many retirement plans available – both employer-sponsored and individual – it’s important to find the one (or combination) that fits your needs. Some plans require joint contributions from both employee and employer, while others can be fully funded by just one party. Each option comes with its own tax advantages, flexibility, and long-term impact, so it pays to explore them all.
Whether you’re running a small business, managing HR, or planning your own future, making smart decisions now can set you up for a more comfortable retirement later.
Need help sorting through your options? Our PEO broker service can connect you with Professional Employer Organizations that offer retirement plan administration, employee benefits, and more, all in one streamlined solution.
FAQ
While the terms are often used interchangeably, a retirement plan typically refers to employer-sponsored programs like 401(k)s and pensions. A retirement savings plan is a broader term that also includes individual options like IRAs and annuities, essentially, any plan designed to help you save for retirement.
It depends on the plan. Contributions to traditional 401(k)s and traditional IRAs are usually tax-deductible, meaning they reduce your taxable income for the year. Roth plans, like Roth 401(k)s or Roth IRAs, use after-tax dollars, so you pay taxes now but enjoy tax-free withdrawals later.
Yes! You can contribute to both a 401(k) through your employer and an IRA you open yourself. Just keep in mind that your ability to deduct traditional IRA contributions may be limited depending on your income and whether your employer offers a retirement plan.
The earlier, the better. Starting in your 20s or 30s gives your money more time to grow through compound interest. But it’s never too late, starting in your 40s or 50s can still make a big difference, especially if you take advantage of catch-up contributions.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
