Raise your hand if you want to keep working until you die. There probably aren't a lot of hands in the air right now, because just about everybody relishes the idea of getting some time off to enjoy their golden years. Of course, to do that, you need some money to live on. And while it's nice to imagine that you'll win the Powerball jackpot and retire with a nine-digit net worth, it's wise to have a plan B in case the whole lottery thing falls through.

That's where retirement accounts come in. The general idea behind any retirement account is that money goes into it and grows until you're ready to retire, at which point you can start withdrawing it to pay for your expenses. Pretty simple, right? Yet when it comes to deciding which kind of retirement account you should use, there's a whole alphabet soup of options: IRA, 401(k), SEP, SIMPLE, and more. All of these retirement account options give you the chance to put away money for retirement while saving on taxes, but they have different features designed to work best in certain situations.

Jar full of hundred-dollar bills

Image source: Getty Images.

Employees with an employer-sponsored plan

If the company you work for offers you a 401(k) account, then use it. (Employees of a nonprofit or government agency will probably be offered a 403(b) account, which is basically the same thing as a 401(k).) Company-sponsored plans are generally the best choice for workers, and that goes double (literally) if your employer makes matching contributions. At the very least, you should contribute enough to max out those matching funds. For example, if your employer will match contributions of up to 5% of your salary, then sign up to contribute at least 5% and enjoy having free money flow into your account with every paycheck you get.

Your contributions come out of pre-tax dollars, so you save on taxes up front. 401(k)s also have one of the highest contribution limits of all retirement accounts, so you can put away a ton of retirement savings. On the other hand, the investment choices are limited to what your employer decides to offer, which could mean you're stuck with lackluster investment options.

Employees without an employer-sponsored plan

Perhaps you don't have an employer-sponsored plan at your disposal because you work for a very small company, or your employer is just a Grinch. In that case, consider using a traditional IRA. You won't have the ability to make pre-tax contributions like you can with a 401(k), but you can deduct those IRA contributions on your tax return, so it comes to roughly the same thing. And IRAs do have one significant advantage over 401(k)s: They tend to have a much wider range of investment options.

That being said, some workers who don't have employer-sponsored retirement plans should consider a different type of IRA -- especially...

Anyone who expects their income to go up significantly

If you're one of the wise people who have just started their career and are already saving for retirement, then you should consider a Roth 401(k) or Roth IRA. With a Roth account, your contributions are taxed, but your withdrawals in retirement are not. This is a great deal if you expect to be in a higher tax bracket when it's time to take the money out, because you're getting the tax-free benefit later, rather than up front as you would with a traditional 401(k)/IRA. As a bonus, you can withdraw the contributions from a Roth account tax-free at any time. (However, until you reach age 59-1/2, you can't withdraw more than you've contributed without paying a 10% penalty tax on the distribution above that amount.) If your income -- and thus your tax rate -- gets higher than you expect it to be in retirement, then you'll want to start putting contributions into a non-Roth retirement account, as that should net you bigger tax savings.


Self-employed types without employees should absolutely set up a SEP-IRA account. It has much higher contribution limits than a regular IRA, but with less paperwork and red tape than an individual 401(k). SEP-IRAs generally have lower fees than 401(k)s, too. And you can make your contribution at any point during the year, so you can wait until the end of the year and then choose a contribution amount that will best suit your compensation and tax situation.

If you have employees

Small-business owners with employees generally find SEPs a poor choice because they require employers to contribute an equal percentage of each employee's salary -- an uncomfortably confining situation. SIMPLE-IRAs are a more flexible option for small employers, giving them the option to match 3% of employees' contributions or contribute 2% of employees' compensation across the board. SIMPLE-IRAs come with the IRA's usual vast array of investment options, and employees can manage their own investments directly through the trustee.

The best account

The best retirement account for you is the one you'll contribute to regularly, even if it's just a few dollars a month. The more you contribute now, the more time your money will have to grow thanks to the magic of compound interest. So, when in doubt, just set up an account and start putting in your money. You can always switch to a different type of retirement account later.

The Motley Fool has a disclosure policy.