On Friday, I wrote a post about why you should invest in a retirement account even if you have a lot of student loan debt. But not all retirement accounts are created equal. If you want to maximize your wealth, it’s important to choose the account (or mix of accounts) that will maximize your tax advantages, earnings, and investment options.

Types of Retirement Accounts

Many people are intimidated by retirement accounts because employers and financial advisers do a poor job of explaining your options. This post will discuss five of the most common types of retirement accounts: IRA, Roth IRA, 401k, Roth 401k and a 403b. For those who like to skip ahead, check out the chart below. Scroll down further for detailed discussion of each account (and what it can do for you.)

Source: IRA.gov

IRAs

Traditional IRA

An IRA stands for Individual Retirement Account. Unlike 401(k)s which are provided by your employer, you open an IRA on your own at a bank or credit union. You can contribute a maximum of $5,000 a year ($6,000 if you’ve over 50) and you won’t have to pay taxes on any of it until you start to make withdrawals. One advantage of an IRA (both traditional and Roth) is that you can invest your savings in anything you want: stocks, bonds, or mutual funds. You aren’t limited to the ten or twenty funds picked for you by your employer.

To see a 13-minute demonstration of how a traditional IRA saves you money, click here.

Roth IRA

The Roth IRA is similar to a traditional IRA in that you open the account on your own through a bank or credit union. However, the tax breaks are different. With a Roth IRA, you pay taxes on all your income earned (including whatever you socked away into your retirement account.) But the great news is that when it comes time to withdraw the money, you don’t pay ANY additional taxes…not even on the money you gained through compound interest.

401(k)s

A 401(k) plan is much like an IRA, except that it is typically offered by your employer and may offer an employer match of up to 6% of your annual income. 401(k)s come in both a traditional and Roth variety. If your employer offers a 401(k) with a match, always take advantage of it. It’s as if they were giving you a raise. Even if you would rather invest in a Roth IRA, contribute at least enough into your 401(k) to maximize the match. Failing to contribute to a 401(k) with a match is like turning down free money!

Traditional 401(k)

A traditional 401(k) allows you to make regular contributions into a retirement account that you own. These contributions are withdrawn directly from your paycheck in the amount you specify. You make all of the investment decisions, but you are usually limited to a small set of options selected for you by your employer. Like an IRA, your contributions to a 401(k) are tax-deductible, making the entire account tax-deferred.  All of the money inside the account grows tax-deferred, but ordinary income taxes will be owed on all withdrawals. Maximum contributions on 401(k)s are much higher than IRAs…up to $16,500 per year.

Roth 401(k)

A Roth 401(k) operates the same way as a traditional 401(k), but employees make their contributions with dollars that have already been taxed, and everything inside grows tax-free. No taxes are owed once you start making withdrawals–but you must be at least 59 1/2 and have held the account for five years or more. This differentiates it from a Roth IRA, which does not make you pay penalties on early withdrawals of the principal.

403(b)

A 402(b) is like a 401k, except that it is offered to employees of tax-exempt organizations like public schools, hospitals, and charities. It also offers some perks to those who have served for 15 years or more in various non-profit sectors. These perks might be an increased contribution limit, or the waiver of certain penalties.