How Retirement Accounts Work

Why this matters

For many people, investing starts at work: a form on the first day of a new job asks what percentage of pay to put into a retirement plan. Knowing what these accounts are, what they offer, and what they ask in return makes that form much less mysterious. This module covers US accounts and rules, and every limit in it is for the 2026 tax year.

Two kinds of workplace plans

The US Department of Labor describes two broad types of workplace retirement plans:¹

• A defined benefit plan, often called a pension, promises a specific monthly benefit at retirement, often calculated from your salary and years of service. The employer is responsible for investing enough to pay it.
• A defined contribution plan doesn't promise a specific benefit. You get the balance in your account: what went in, plus or minus how the investments did. Examples include 401(k) and 403(b) plans.

The difference is who carries the investment risk. In a pension, it's mostly the employer. In a defined contribution plan, it's you, which is why the rest of this curriculum matters so much for anyone saving through one.

The main accounts

Most US retirement saving happens in two families of accounts:

• Workplace plans, offered through an employer. A 401(k) lets you put part of your pay into the plan, and your employer may add money too.² Public schools and many nonprofits offer 403(b) plans,³ and state and local governments offer 457(b) plans.⁴
• Individual retirement arrangements, or IRAs, which you open yourself with a bank, a brokerage, a mutual fund company, or a life insurance company.⁵

Account	Who offers it	Yearly limit on your own contributions
401(k)	Many private employers	$24,500
403(b)	Public schools, churches, and many nonprofits	$24,500
457(b)	State and local governments, some nonprofits	$24,500, with a separate limit
IRA	You open it yourself	$7,500

Limits for people under 50. Older savers can add more, and 401(k) and 403(b) contributions share one limit. Contribution Limits and Deadlines has the full set.⁶

Most of these accounts come in two versions. In a traditional account, contributions can lower your taxes now and withdrawals are taxed later. In a Roth account, you contribute money that's already been taxed, and qualified withdrawals can be tax-free.⁵ Traditional vs. Roth covers how to think about the choice.

The deal: tax benefits for rules

Every retirement account offers the same basic bargain. Inside the account, investments can grow without yearly tax on dividends, interest, or gains. In exchange, you accept three kinds of rules:

• Limits on what goes in. Each account has a yearly contribution limit, adjusted most years for inflation.⁶
• Limits on taking money out early. Withdrawals before age 59½ generally owe an additional 10% tax on top of regular income tax, unless an exception applies.⁷
• Rules on taking money out later. Most accounts require you to start withdrawing a minimum amount each year once you reach age 73.⁸

Early Withdrawals and Required Minimum Distributions covers both withdrawal rules and their exceptions.

An account is a container

Opening an account and choosing investments are two separate decisions. A 401(k) or IRA is a container with special tax rules. What you hold inside it, such as stock funds, bond funds, or cash, decides how much it can grow and how much it can fall. Most workplace plans offer a menu of investments to choose from,⁹ and many have a default investment for people who don't choose, such as a target-date fund.¹⁰ Target-Date Funds explains how those work.

Everything in Parts 2 to 5, from funds to diversification to asset allocation, applies inside these accounts just as it does outside them.

Key takeaways

• A defined benefit plan promises a set benefit; a defined contribution plan, like a 401(k), gives you whatever your account grows to.
• Workplace plans include 401(k)s, 403(b)s, and 457(b)s. IRAs are accounts you open yourself.
• Retirement accounts trade tax benefits for rules: contribution limits, an extra tax on most early withdrawals, and required withdrawals later.
• The account is a container. The investments inside it decide the return and the risk.

Check your understanding

In a 401(k), who carries the risk that the investments do poorly?

1. The employer, which has promised a set monthly benefit at retirement.
2. You, because your benefit is whatever your account balance grows to.
3. The IRS, which guarantees the value of all tax-advantaged accounts.

A friend says, "My money is safe, it's in an IRA." What's missing from that statement?

1. Nothing. IRAs are insured against investment losses up to a set limit.
2. Whether the IRA was opened at a bank or at a brokerage firm.
3. What the IRA holds. The account type doesn't decide the risk.

What's next

The next lesson looks at the most common workplace plans in detail: 401(k)s and Other Workplace Plans.