The Internal Revenue Service (IRS) recognizes a number of retirement plans as "qualified retirement plans," which means they receive special tax treatment. In addition, qualified retirement plans can only accept rollovers from other qualified plans. For example, you can roll money from a 401k plan to an IRA, but you cannot move money from an ordinary brokerage account into an IRA.
Individual Retirement Accounts
Individual retirement accounts (IRAs) can be opened by people rather than by employers. Traditional IRAs offer tax-deferred retirement savings, which means that contributions can be deducted, and withdrawals from the account must be included as taxable income. (IRA contributions cannot be deducted if you or your spouse can participate in an employer-sponsored plan and your modified adjusted gross income exceeds the annual limits.) Roth IRAs offer after-tax savings, which means qualified withdrawals can be taken from the account tax-free. IRAs have more restrictive contribution limits than 401k plans or 403b plans, and IRAs cannot accept contributions from employers. You have complete control over your IRA investments; the only investments explicitly prohibited in an IRA by the IRS are collectible items, such as antiques or artwork.
For-profit companies can set up 401k plans to assist their employees with their retirement nest eggs. These plans can either be traditional 401k plans or Roth 401k plans. Traditional 401k plans offer tax-deferred savings while Roth 401k plans offer after-tax savings. The IRS permits employers to contribute to these plans on behalf of their employees. However, the matching contributions must go into a traditional 401k plan even if the employee contributions are made to a Roth 401k plan. Employers can require a vesting period for matching contributions made to a 401k plan on the employee's behalf. This means that if you leave employment before the vesting period ends--no longer than five years--you may not get to keep a part or all of the matching contributions made on your behalf. Funds from a 401k plan can be invested in any of the plans offered by your employer.
A 403b plan functions similarly to a 401k plan except that 403b plans are offered by nonprofit organizations instead of for-profit corporations. In addition, the IRS prohibits 403b plans from requiring a vesting period. The 403b plans can be either traditional 403b plans, which are tax-deferred, or Roth 403b plans, which offer after-tax savings. A 403b plan permits money to be invested only in annuities and mutual funds.