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Retirement accounts aren't just savings vehicles—they're tax strategy tools that can save you tens of thousands of dollars over your lifetime. You're being tested on understanding the key differences between account types: tax treatment timing, contribution limits, employer involvement, and withdrawal rules. The exam expects you to analyze which account fits a specific financial situation, not just recall definitions.
Think of retirement accounts as falling into two big categories: who sponsors them (you vs. your employer vs. the government) and when you pay taxes (now vs. later). Don't just memorize account names—know what makes each one strategically valuable and when you'd recommend one over another.
These accounts let you contribute pre-tax dollars, reducing your taxable income today. The trade-off? You'll pay ordinary income tax when you withdraw funds in retirement. The strategy assumes you'll be in a lower tax bracket when you're older.
Compare: 401(k) vs. 403(b)—both are employer-sponsored, pre-tax plans with similar contribution limits and RMD rules. The only real difference is who can use them: private sector employees get 401(k)s, while teachers and nonprofit workers get 403(b)s. If a question describes someone's employer, that determines which account applies.
With these accounts, you contribute after-tax dollars—no deduction today. The payoff? Qualified withdrawals in retirement are completely tax-free, including all the growth your investments earned over decades.
Compare: Traditional IRA vs. Roth IRA—both are individual accounts with the same contribution limits, but the tax treatment is reversed. Choose Traditional if you expect a lower tax bracket in retirement; choose Roth if you expect higher taxes later or want flexibility without RMDs. This is a classic FRQ comparison scenario.
Self-employed individuals and small business owners need retirement options that accommodate variable income and offer higher contribution limits than standard IRAs. These plans let you save aggressively while reducing business taxes.
Compare: SEP IRA vs. SIMPLE IRA—both serve small businesses, but SEP works best for solo operators or those with few employees (employer-only contributions), while SIMPLE suits businesses wanting employees to contribute too. SEP offers higher limits; SIMPLE offers shared responsibility.
Unlike the accounts above (which are defined contribution plans where your retirement depends on investment performance), these options guarantee specific benefits. The risk shifts from you to the employer or government.
Compare: Pension vs. 401(k)—pensions guarantee a specific monthly payment (defined benefit), while 401(k)s only guarantee what you put in (defined contribution). Pensions are safer for employees but riskier for employers, which is why most companies have abandoned them.
Compare: HSA vs. Roth IRA—both offer tax-free growth, but HSAs provide an additional tax deduction on contributions that Roth IRAs don't. For medical expenses, HSAs are the most tax-efficient account available. After 65, an HSA functions similarly to a Traditional IRA for non-medical spending.
| Concept | Best Examples |
|---|---|
| Pre-tax contributions (tax-deferred) | Traditional IRA, 401(k), 403(b), SEP IRA, SIMPLE IRA |
| After-tax contributions (tax-free growth) | Roth IRA, Solo 401(k) Roth option, HSA |
| Employer-sponsored plans | 401(k), 403(b), SIMPLE IRA, Pension |
| Self-employment options | SEP IRA, SIMPLE IRA, Solo 401(k) |
| No RMDs during lifetime | Roth IRA, HSA |
| Employer matching available | 401(k), 403(b), SIMPLE IRA |
| Guaranteed retirement income | Pension, Social Security |
| Highest contribution limits | Solo 401(k), SEP IRA, 401(k) |
Which two accounts allow tax-free withdrawals in retirement, and what's the key difference in their eligibility requirements?
A self-employed graphic designer with no employees wants to maximize retirement contributions. Compare the SEP IRA and Solo 401(k)—which offers more flexibility, and why?
Why might someone choose a Traditional IRA over a Roth IRA, even if they qualify for both? What assumption about future taxes drives this decision?
Identify three retirement accounts that require RMDs at age 73 and one that doesn't. What's the strategic advantage of avoiding RMDs?
Compare a 401(k) and a pension plan in terms of who bears the investment risk. If you were advising someone choosing between two job offers—one with each type of plan—what factors should they consider?