Defined Benefit Plans — Traditional Pensions
A defined benefit (DB) pension guarantees a specific monthly payment in retirement based on a formula — typically involving years of service and average salary. The employer funds and manages the investment risk; you receive a predetermined benefit regardless of investment performance. DB pensions are now rare in the private sector (about 15% of private-sector workers have one) but remain common for government employees, teachers, military, police, and firefighters.
The key advantage: guaranteed income for life (with survivor benefit options for spouses). The disadvantage: less portable than a 401(k) — leaving a job early reduces or eliminates benefits in many plans. If you have a pension, understand your vesting schedule, the survivor benefit options, and whether you can take a lump sum vs monthly payment at retirement (if offered, run the numbers carefully — monthly is often better for people in good health).
Defined Contribution Plans — 401(k), 403(b), 457
Defined contribution plans shift both the funding responsibility and investment risk to the employee. You contribute a percentage of your salary (pre-tax for traditional, after-tax for Roth); many employers match contributions up to a limit. The account balance is yours — fully portable when you leave a job. The account grows based on investment performance. At retirement, you draw down the account. 401(k) = private sector; 403(b) = nonprofits and education; 457(b) = government employees. All share similar rules with some variations. Always contribute at least enough to capture the full employer match — it's an immediate 50–100% return on that contribution.
Individual Retirement Accounts — Traditional and Roth
Traditional IRA: Contributions are pre-tax (if you meet income and workplace plan requirements), grow tax-deferred, and withdrawals are taxed as ordinary income in retirement. Subject to RMDs starting at 73. Best when current tax rate is higher than expected retirement tax rate. Roth IRA: Contributions are after-tax, growth is tax-free, qualified withdrawals are tax-free, and no RMDs. Best when current tax rate is lower than expected retirement tax rate, or when you want tax diversification. Income limits for Roth contributions: $161,000 (single) / $240,000 (married) in 2026. High earners can use "backdoor Roth" conversions to contribute regardless of income.
2026 Contribution Limits
| Account Type | Under 50 | 50+ (with catch-up) |
|---|---|---|
| 401(k) / 403(b) / 457(b) | $23,500 | $31,000 |
| IRA (traditional or Roth) | $7,000 | $8,000 |
| SEP IRA (self-employed) | 25% of compensation up to $70,000 | Same |
| SIMPLE IRA | $16,500 | $20,000 |
Tax Treatment Comparison
| Account | Contribution Tax | Growth | Withdrawal Tax | RMDs |
|---|---|---|---|---|
| Traditional 401(k)/IRA | Pre-tax | Tax-deferred | Ordinary income | Yes, at 73 |
| Roth 401(k)/IRA | After-tax | Tax-free | Tax-free | Roth IRA: No; Roth 401k: No (SECURE 2.0) |
| Pension (DB) | Employer-funded | N/A | Ordinary income | N/A (mandatory distributions) |
Which Is Best — Depends on Your Situation
If you have a pension: treasure it — guaranteed lifetime income is the safest retirement foundation. Supplement with IRA/Roth savings. If you're in a high tax bracket now: maximize traditional pre-tax contributions to reduce current taxes; convert to Roth during lower-income years. If you're in a low tax bracket: prioritize Roth contributions for future tax-free income. If your employer matches 401(k): always contribute enough to capture the full match before any other savings decision. Near retirement with nothing saved: see the catch-up contribution strategies in Catch-Up Contributions After 50.
How to Combine All Three
The optimal retirement portfolio typically includes tax diversification across account types. A mix of traditional (taxable in retirement), Roth (tax-free), and taxable brokerage accounts provides flexibility to manage your tax bill year-to-year in retirement — drawing from whichever bucket produces the lowest tax outcome in any given year. Most financial planners suggest: first, contribute enough to 401(k) to capture employer match; second, max out Roth IRA (if eligible); third, return to 401(k) up to the limit; fourth, invest in taxable brokerage if more savings are desired. This sequence generally optimizes across tax advantages, flexibility, and fee efficiency.