Retirement accounts
There are several different ways to break apart the types of retirement accounts.
Individual accounts are retirement accounts opened by individuals rather than through an employer. The primary types here are Roth IRAs and traditional IRAs.
Employer-sponsored plans are the other big group, with far more types of plans.
Individual retirement accounts (IRAs)
Any individual with earned income can contribute to an IRA, Roth or traditional, even if they’re also part of an employer/employee plan. There’s no minimum age. One useful real-world detail: the contribution itself doesn’t have to come out of the account owner’s own pocket. For example, a 16-year-old with a part-time job who earns and reports $6,000 in income for the year could have up to $6,000 contributed to an IRA on their behalf - by a parent, grandparent, or anyone else - because a contribution can never exceed the lesser of earned income or the annual contribution limit.
In 2026, the maximum contribution is $7,500, combined across both account types. There’s also a $1,100 catch-up contribution after age 50, so anyone 50 or older could contribute up to $8,600. The $7,500 limit can be split however the investor likes: for example, the full $7,500 into a Roth, the full $7,500 into a traditional IRA, a split of $4,000 to Roth and $3,500 to traditional, or any other combination - but the total across both accounts can’t exceed $7,500 in 2026.
Contributions can be made up to April 15 of the following year for the current year. If someone wanted to make a contribution for 2026, they could do it from January 1, 2026, all the way to April 15, 2027.
Other IRA investments
Certain gold and silver coins and bullion can be held in an IRA, even though they don’t produce anything until they’re sold and so get little benefit from tax deferral. Municipal bonds aren’t prohibited in an IRA either, but they’re strongly advised against: their interest is already tax-exempt, so they gain nothing from the IRA’s tax deferral, and they use up the limited annual contribution. An IRA can’t invest in collectibles, such as artwork, antiques, gems, stamps, and most coins and metals; the cost of one is treated as a distribution. The coins and bullion above are the exception: certain U.S.-minted gold, silver, and platinum coins, and gold, silver, platinum, or palladium bullion of a minimum fineness held by the IRA’s trustee (Internal Revenue Code Section 408(m)).
IRA rollovers and transfers
IRA money can move from one IRA to another, tax free, in two ways: a transfer or a rollover. In a trustee-to-trustee transfer, one custodian sends the money directly to another custodian - the investor never takes possession of the funds, and there’s no limit on how often it can be done. In a 60-day rollover, the investor receives the money directly and has 60 days to deposit it into the new account; miss that window and the distribution becomes taxable, plus a 10% early withdrawal penalty if the investor is under 59.5. Because of that risk, rollovers are limited to one per rolling 12-month period, counting all of the investor’s IRAs together, while transfers are unlimited and are the safer choice.
Employer-sponsored plans
As the name suggests, these are plans sponsored by employers for their employees. These can be thought of as employer/employee plans. Many benefit from very nice IRS tax benefits, but those will have to follow the Employee Retirement Income Security Act, or ERISA. Plans that follow ERISA are qualified plans, those that do not follow the ERISA guidelines are nonqualified plans.
Qualified plans are tax-deductible; the investor is not taxed on the money they contribute, and it is deducted from their income. Qualified plans are also tax-deferred; the investor doesn’t pay any taxes that might be due each year, instead they are deferred, pushed into the future.
The ERISA qualification standards include rules for participation, vesting, funding, tax treatment, and the administration of the specific employer/employee plan.
Participation
A plan can’t discriminate in favor of highly compensated employees, and it can’t use age or length of service to keep out an employee who meets the minimum requirements below. It may still leave some of those employees out for another reason, such as their division or job class, as long as it passes a coverage test: for example, by benefiting at least 70% of the employees who aren’t highly compensated. For full-time employees, anyone over age 21 who has worked at least 1,000 hours during the previous year must be able to contribute. For part-time employees, anyone over age 21 who has worked at least 500 hours in each of the past 2 consecutive years must be able to make salary deferrals into a 401(k) or 403(b) plan. (It was 3 years before 2025.)
Vesting
Vesting is the idea of how much of the money in the account an employee can take if they leave the plan before the retirement date. The employee is always 100% vested in the money they have contributed, but how much of the employer’s money does the employee keep if they leave? There are IRS-approved vesting schedules for the employer’s money, and they depend on the type of plan. A defined-contribution plan, like a 401(k), uses either a 3-year cliff (100% after 3 years) or graded vesting over 2-6 years (20% after 2 years, rising 20% a year to 100% after 6). A defined-benefit plan, covered next, can vest more slowly: either a 5-year cliff or graded vesting over 3-7 years (20% after 3 years, rising 20% a year to 100% after 7).
Funding
All ERISA-qualified plans must be funded, and that money must be kept separate and not commingled with the company’s other money. The money can be kept at a bank, a trustee, or a similar type of company. In ERISA’s terms, plan assets must be held in trust by one or more trustees (ERISA Section 403).
The funding will either come from the plan being a defined-benefit plan (basically pensions), or a defined-contribution plan. Defined-benefit plans define the benefit. As an example: 80% of the average of the last 5 years of employment salary. The company then has the responsibility to make the payments required to meet that benefit. Defined contribution, on the other hand, has a defined contribution, usually made primarily by the employee, but also often matched by the employer. There are some that only have employer contributions. A simplified employee pension (SEP) works that way: the employer, which can be a self-employed person, contributes to a traditional IRA set up for each employee (a SEP-IRA), and employees can’t make salary deferrals into it (Internal Revenue Code Section 408(k)).
Tax treatment
As mentioned earlier, these are qualified plans, meaning they are tax-deductible, and tax-deferred. The money is not taxed the year it’s contributed, and not taxed each year on potential taxable events.
Administration
Each plan must have a fiduciary, some advisor with a fiduciary duty to the plan, not the company. Fiduciaries may not participate in any transactions that put their interests ahead of the plan’s interests. Fiduciaries must also diversify the plan’s investments to minimize the risk of large losses, unless it is clearly prudent not to. The employer stock held by an ESOP is exempt from that requirement, which is why an ESOP can stay concentrated (ERISA Section 404). Certain transactions between a plan and a party in interest are prohibited unless ERISA specifically exempts them. A party in interest is a wider group than the people in control of the plan: it includes the employer, the plan’s fiduciaries, and its service providers. These transactions include selling, exchanging, or leasing property between the plan and a party in interest, furnishing goods, services, or facilities between them, or lending money or credit between them.
Common qualified plans
401(k)
A very common type of corporate retirement account. The standard plan when we think about plans with vesting. The employee defines their contribution, the employer may or may not match, and that money is put tax-deductibly into the account. The growth is then tax deferred, but the risks are on the employee in making sure they pick appropriate investments in the 401(k) plan.
403(b)
A very common type of plan for non-profits. Primarily used for schools, hospitals, churches, and other 501c3s.
Profit-sharing
Profit-sharing plans don’t require a set contribution every year; the employer decides each year whether, and how much, to contribute. Despite the name, contributions don’t actually depend on the company having profits that year.
Employee stock ownership plan (ESOP)
ESOPs invest primarily in the employer’s stock. The employer funds the plan, contributing its shares, or cash to buy them, so employees don’t buy in with their own money; it works similarly to a 401(k) match. Buying company stock at a discount through payroll is a different arrangement, an employee stock purchase plan.
Non-qualified retirement plans
Non-qualified plans don’t have to follow ERISA rules, so companies can use them selectively - often to benefit higher-income employees, directors, and C-suite executives. These plans are sometimes called golden handcuffs: the employee is promised a large benefit, but only if they stay with the company until retirement. Leave early for another employer, and the employee forfeits the unvested benefit. That’s a different idea from a golden parachute, where a departing executive receives a large payout on the way out.
Deferred compensation, as mentioned, is the most common of these. The compensation is deferred until retirement. It is kept in a separate account of the firm, and should the company go bankrupt or have legal challenges, that account is property of the firm and could be seized.
There have historically been other non-qualified plans, including payroll deduction: a plan that allows certain employees to deduct a certain amount of their paycheck to pay for insurance, investments, or other things. In the modern world, deferred compensation is the most common.