Not All Retirement Accounts Are the Same: What Everyone Should Know

Social Security will help supplement retirement income, but additional resources are required to support your needs and lifestyle after work ceases.

This month, we will provide a brief overview of the various vehicles that are now offered via legislation that can help fund your retirement.

Creating our list

Retirement accounts are simple in concept—tax-deferred savings that are available to you in retirement. But the details can be confusing. So, we’ll keep the discussion high-level, focusing on retirement options available outside employer-sponsored plans like 401(k)s and 403(b)s.

Which option may be most beneficial for your situation? Let’s explore various account choices. If you have questions, we’re happy to help you find the right approach. As with any tax-related issues, feel free to check in with your tax advisor.

1. Let’s start with the traditional Individual Retirement Account, or IRA.

As the name indicates, the account is opened by an individual, and it’s independent of an employer. Anyone who has earned income may contribute to an IRA account. If eligible, contributions are tax deductible. Earnings and capital gains in the IRA are tax deferred. Taxes are paid only when funds are withdrawn.

In 2026, the maximum IRA contribution across all IRA accounts is $7,500 if less than 50 years old. If you are 50 or older, you may contribute up to $8,600.

Advantages:

• Tax-deductible contributions if eligible
• Tax-deferred growth
• Ability to name beneficiaries (avoids probate)
• Flexibility of investment options
• Simple to open
• Record-keeping by brokerage or bank

Disadvantages:

• Taxes paid at withdrawal
• Early withdrawal penalties
• Complexities regarding deductibility issues that arise from one’s own company retirement plan or a spouse covered at work
• Required minimum distributions (RMDs)

2. A Roth IRA is similar. If you are eligible to open and contribute to one, contributions are made with after-tax dollars, and qualified withdrawals are not subject to federal income taxes.

A Roth has similar advantages and disadvantages to a traditional IRA. Though there are some differences. A Roth enables you to make tax-free withdrawals in retirement, and RMDs are not required. But contributions are made with after-tax dollars.

3. Business owners have the option of setting up a Simplified Employee Pension Individual Retirement Account, or what is commonly called a SEP IRA.

A SEP IRA is an employer-funded retirement plan that allows a business owner to make contributions to IRAs set up for themselves and their employees.

Self-employed individuals, independent contractors, and small and large businesses can take advantage of SEP IRAs.

Unlike an IRA, the business owner makes the tax-deductible contribution into his or her own account as well as employees’ accounts. Employees receive the same percentage of their pay as the owner. In other words, if the owner contributes 15% of compensation, employees receive 15% in their respective plans.

In some respects, the SEP IRA is like a pension for the employees, as employees don’t contribute to the account. However, unlike a pension, it is a defined contribution plan, as it has a specific account balance, similar to a 401(k). Additionally, it can operate like a profit-sharing plan, giving the employer flexibility to boost contribution rates (reward employees) during more profitable years.

For 2026, the maximum amount of compensation considered when calculating contributions is $360,000. For self-employed owners, net earnings must be reduced by both the retirement contribution itself and the self-employment tax, resulting in an effective contribution rate of about 20% of net earnings.

The SEP IRA contribution limit for 2026 is 25% of an employee’s total compensation, up to $72,000.

Advantages:

• Potentially high contribution limits vs. an IRA
• Tax-deductible contributions
• Wide investment options
• Easy setup
• Easy to administer
• Flexible contribution amounts year-to-year
• Employee retention and recruitment benefit tool
• Immediate vesting
• Beneficiary option

Disadvantages:

• Withdrawals taxed
• Added employer expense
• No Roth option
• No employee contribution option
• RMDs required

4. The solo (individual) 401(k) for business owners is a powerful tool that can be used to defer taxes and save for retirement as long as you are a small business owner with no employees (except your spouse).

In 2026, the maximum you can contribute is $24,500 as the employee plus an additional 25% of compensation as the employer, with additional catch-up contributions if you are 50 or older.

The $24,500 ceiling is a flat dollar limit. This feature is what makes the solo 401(k) such a powerful savings vehicle. For example, someone with $40,000 in earned income could contribute up to $24,500 to the plan under the employee contribution limit without tapping the employer contribution.

In 2026, aggregate contributions are $72,000 if you’re under 50, with an additional $8,000 in catch-up contributions if you’re between 50 and 59 or 64 or older.

If you are between 60 and 63, you may contribute an additional $11,250 in catch-up contributions.

Advantages:

• High limits for lower and moderate incomes
• Roth option
• Availability of employee and employer contribution options
• Year-to-year flexibility on contributions
• Option to add beneficiaries
• Loan features
• No income caps on high wage earners

Disadvantages:

• Greater paperwork, recordkeeping, compliance, contribution tracking, and potential need to engage a third-party administrator
• RMD requirement for non-Roth. (Secure 2.0 Act exempts RMDs in Roths)
• Restrictive loan rules
• Generally not allowed for the owner if the business has employees

At lower income levels, contributions can be substantially higher versus a SEP IRA due to the employee deferral option, but be aware that a solo 401(k) doesn’t share the paperwork simplicity of the SEP IRA. At a much higher income, the SEP IRA may be the easiest option.

5. Finally, let’s review the Health Savings Account, or HSA.

If you have a high-deductible healthcare plan and your plan has an HSA option, you may contribute up to $4,400 as an individual or $8,750 for family coverage. If over 55 or older, you may make an additional $1,000 “catch-up” contribution.

Advantages:

• Tax-deductible contributions
• Tax-deferred growth
• Tax-free withdrawals if used for qualified medical expenses
• A wide array of investment options
• No use-it-or-lose-it that occurs with FSAs
• Penalty-free withdrawals at age 65 for non-medical expenses—just pay the taxes as with an IRA
• Option to pay Medicare premiums (excluding Medigap) from your HSA

Disadvantages:

• Requires high-deductible healthcare plan
• Record-keeping of expenses
• Withdrawals outside qualified medical expenses may include taxes and a 20% penalty

If you are healthy and comfortable with a higher deductible, premium savings can be plowed back into an HSA, lowering taxes and providing you with a savings account that can be used for medical expenses.

Moreover, it effectively doubles as a retirement account at 65 years old, as nonqualified withdrawals at 65 are taxed as regular income.

As demonstrated, there isn’t a shortage of options available. Choosing the right approach, however, depends on your goals, employment status, income, and tax considerations.

So, if you have questions, we’re here to walk through your options and help find the best fit for you. As your goals or personal circumstances evolve, we can help guide any necessary mid-course adjustments.