Retirement Accounts Explained
401(k), IRA, Roth, traditional: the names are confusing, but the ideas are simple. Learn how each account saves you tax, how to get every dollar of your employer match, and the 2026 limits from the IRS. Then run your own numbers.
Why retirement accounts beat a regular account
A retirement account is a container with special tax rules. Inside it you buy ordinary investments, like index funds or target-date funds. The container decides when you pay tax, and that makes a big difference over decades. If investing itself is new, start with Investing for Beginners.
Tax break now
Money goes in before income tax, which lowers your tax bill this year. It grows untaxed. You pay income tax when you take it out in retirement.
Tax break later
Money goes in after you pay tax. It grows untaxed, and qualified withdrawals in retirement are completely tax-free.
- Workplace plans: 401(k) (most companies), 403(b) (schools, hospitals, nonprofits), 457(b) (state and local government), and the TSP (federal employees and military). Many offer both traditional and Roth versions.
- IRAs (individual retirement arrangements): accounts you open yourself at a bank or brokerage. Traditional IRA or Roth IRA.
The trade-off: to get the tax break, you agree to mostly leave the money alone until age 59½. Lesson 5 covers the exceptions.
The 401(k) and your employer match
You choose a percentage of each paycheck to contribute, and it goes in automatically. Many employers add a match: free money on top of what you put in, up to a limit. Common formulas:
- “50% of the first 6%”: you put in 6% of pay, they add 3%.
- “100% of the first 3%, then 50% of the next 2%”: you put in 5%, they add 4%.
- “100% of the first 4%”: you put in 4%, they add 4%.
If you contribute less than the amount the formula matches, you leave part of the match unclaimed. That's an instant 50% or 100% return you can't get anywhere else.
Vesting and automatic enrollment
- Your own contributions are always 100% yours. Employer money may vest over time, for example a few years of service before you can keep all of it if you leave. Check your plan's summary.
- Automatic enrollment: many plans, including most new ones, sign you up automatically at a set percentage. You can change the amount or opt out, but check that it's at least enough for the full match.
- Pick investments: if you don't choose, money usually goes into a default, often a target-date fund. That's a reasonable start, but look at its fees.
IRAs: traditional and Roth
An IRA is a retirement account you open yourself, separate from work. You can have one even if you also have a 401(k). You (or your spouse, if filing jointly) need earned income, like wages or self-employment income, to contribute.
| Traditional IRA | Roth IRA | |
|---|---|---|
| Tax break | Contributions may be tax-deductible now | No deduction now; qualified withdrawals tax-free |
| Income limits | Anyone with earned income can contribute. The deduction phases out if you (or a spouse) have a workplace plan and earn above certain amounts. | Ability to contribute phases out at higher incomes (2026: $153,000–$168,000 single, $242,000–$252,000 married jointly) |
| Taking money out | Taxed as income; 10% extra tax before 59½ unless an exception applies | Your contributions can come out anytime, tax- and penalty-free. Earnings follow the 59½ and 5-year rules. |
| Required withdrawals | Yes, starting at age 73 | None while you're alive |
Deadline: you can make IRA contributions for 2026 until your tax filing deadline in April 2027 (not including extensions). When you contribute, tell the provider which year it's for.
2026 traditional IRA deduction with a workplace plan: the deduction phases out between $81,000 and $91,000 of income for single filers, and $129,000 to $149,000 for married couples filing jointly when the contributing spouse is covered.
Roth vs traditional: pay tax now or later?
The question is really: is your tax rate higher now, or will it be higher in retirement?
- Roth tends to win when your tax rate is low now and likely to be higher later: early career, lower income, or you expect big growth.
- Traditional tends to win when your tax rate is high now and likely lower in retirement: peak earning years.
- Equal tax rates? They come out exactly the same. Many people split between both to hedge, since no one knows future tax rates.
Enter how much of your pay you set aside each year before tax. With traditional, all of it gets invested. With Roth, you pay tax on it first and invest what's left.
Real life is messier: your retirement tax rate depends on future tax law, other income and where you live. A traditional contribution also lowers your taxable income today, which can help you qualify for some credits. And a dollar in a Roth is worth more than a dollar in a traditional account, so if you can afford to max out the limit, Roth shelters more.
2026 limits and withdrawal rules
| 2026 limit (IRS) | Amount |
|---|---|
| 401(k), 403(b), most 457 plans, TSP: your contributions | $24,500 |
| Catch-up, age 50 and over | +$8,000 |
| Higher catch-up, ages 60 to 63 | +$11,250 (instead of $8,000) |
| IRA (traditional and Roth combined) | $7,500 |
| IRA catch-up, age 50 and over | +$1,100 |
New in 2026: if you earned more than $150,000 in wages from your employer the year before, your 401(k) catch-up contributions must go in as Roth. Employer match doesn't count toward your $24,500.
Taking money out early
- Before age 59½, withdrawals from a 401(k) or traditional IRA are usually taxed as income plus a 10% additional tax.
- Exceptions to the 10% include total and permanent disability, a qualified birth or adoption (up to $5,000), up to $10,000 for a first-time home purchase (IRAs only), qualified higher education costs (IRAs only), certain large medical bills, and one emergency withdrawal of up to $1,000 a year. Income tax usually still applies.
- Rule of 55: if you leave your job in or after the year you turn 55, withdrawals from that employer's 401(k) skip the 10% extra tax.
- Roth IRA: you can always withdraw what you contributed. Earnings come out tax-free once you're 59½ and the account has been open at least 5 years.
- 401(k) loans: some plans let you borrow from yourself. If you leave your job, a loan you can't repay can become a taxable withdrawal.
Changing jobs
Your 401(k) stays yours. You can usually leave it in the old plan, move it to your new employer's plan, or do a direct rollover to an IRA. Ask for a direct rollover so no tax is withheld. Cashing out triggers income tax and usually the 10% extra tax.
Cashing out early is expensive. A $10,000 withdrawal at age 35 in the 22% bracket could cost $2,200 in income tax plus $1,000 extra tax, leaving about $6,800, and you lose decades of growth on it.
FAQCommon questions
Can I have a 401(k) and an IRA?
Yes. The limits are separate. Having a workplace plan can limit whether your traditional IRA contribution is deductible, but you can still contribute.
What should I do first: 401(k) or IRA?
A common order: contribute to your 401(k) up to the full match, then consider an IRA (often a Roth IRA), then go back and raise your 401(k) contribution.
Does the employer match count toward my $24,500 limit?
No. The $24,500 is only for your own contributions. There's a much higher separate cap on total contributions from you and your employer combined.
Is a Roth 401(k) the same as a Roth IRA?
Both are taxed the same way going in and coming out, but a Roth 401(k) is through your job with the higher $24,500 limit and no income limit. A Roth IRA has the $7,500 limit and income limits.
What if I contribute too much?
Excess contributions can be taxed each year they stay in the account. Contact your plan or IRA provider to remove the extra (and its earnings) before your tax filing deadline.
Is it too late to start at 40 or 50?
No. Catch-up contributions from age 50 let you put in more, and even 15 to 20 years of growth plus an employer match adds up.