Retirement planning revolves around tax-advantaged accounts that shelter growth from current taxation. In the US, the 401(k) is an employer-sponsored plan allowing pretax contributions that reduce taxable income now and are taxed upon withdrawal. A Roth 401(k) reverses the timing: contributions are made after tax, but qualified withdrawals in retirement are tax-free. Many employers offer a match, contributing money equal to a percentage of your own deferrals, and vesting describes the process by which you earn full ownership of those employer contributions over time. Required Minimum Distributions force withdrawals from most retirement accounts starting at a certain age, ensuring the government eventually collects taxes on deferred growth.
Outside of employer plans, individuals can open an Individual Retirement Account, or IRA. A traditional IRA allows pretax contributions with taxation on withdrawal, while a Roth IRA accepts after-tax contributions and provides tax-free growth and qualified withdrawals. Contribution limits apply annually—for 2024, the 401(k) limit is $23,000 with an additional $7,500 catch-up contribution for those 50 and older, while the IRA limit is $7,000 with a $1,000 catch-up. Choosing between traditional and Roth accounts depends on your expected tax bracket in retirement: if you expect to be in a lower bracket later, traditional wins; if you expect higher taxes, Roth wins.
Beyond retirement, several accounts address other major expenses. A Health Savings Account (HSA) is a triple-tax-advantaged vehicle for medical expenses, available to those enrolled in a High-Deductible Health Plan; contributions are pretax, growth is tax-free, and withdrawals for qualified medical costs are tax-free. A Flexible Spending Account (FSA) is similar but typically operates on a use-it-or-lose-it basis within the plan year. A 529 plan is a state-sponsored account designed for education expenses, offering tax-deferred growth and tax-free withdrawals when used for qualified education costs. Together, these accounts form a coordinated system for sheltering income, health, and education savings from current taxation.