401(k), IRA and Roth: How the Accounts Differ

Where you save for retirement can matter almost as much as how much you save, because the account decides when you pay tax and when you can reach the money. This chapter explains the three accounts most people use, the workplace 401(k), the traditional IRA and the Roth IRA, how they differ, and how to think about the choice between paying tax now and paying it later. Limits and income ranges are the 2026 figures published by the IRS.

The one idea behind every account: when you pay tax

Every tax-advantaged retirement account gives one of two deals.

Traditional (pre-tax). Contributions reduce your taxable income this year. The money grows without yearly tax, and withdrawals in retirement are taxed as ordinary income.

Roth (after-tax). Contributions get no deduction now. The money grows without yearly tax, and qualified withdrawals in retirement are tax-free, including all the growth.

If your tax rate were the same when you contribute and when you withdraw, the two deals would leave you with the same amount to spend. The difference comes from the rate changing. A traditional account wins when your rate in retirement is lower than your rate today; a Roth wins when it is higher. Because nobody knows future tax law or their own future income for certain, many people hold some of each. That mix is often called tax diversification, and it gives you choices about which account to draw from each year in retirement.

Both kinds of account beat an ordinary taxable brokerage account for long-term saving in most cases, because the growth is not taxed year by year.

The 401(k): the workplace plan

A 401(k) is offered by an employer and funded through payroll. Similar plans exist for other employers: the 403(b) for schools and nonprofits, the 457(b) for many state and local governments, and the Thrift Savings Plan for federal employees and the military.

For 2026 you can contribute up to $24,500 of your own pay across all your 401(k), 403(b) and Thrift Savings Plan accounts combined. Workers 50 and older may add catch-up contributions, covered in chapter 6. Employer contributions come on top, and the total going into one plan from you and your employer together is capped at $72,000 or your pay, whichever is less, not counting catch-up contributions.

Many plans offer both a traditional and a Roth 401(k). The same employee limit covers both, so you can split contributions between them. A Roth 401(k) has no income limit, which makes it a way for high earners to save in a Roth account. Under rules in force since 2024, a Roth 401(k) no longer requires minimum distributions during the owner's lifetime.

The biggest advantage of most 401(k)s is the employer match, money your employer adds when you contribute. Chapter 5 explains how matches work and why they usually come first. The main drawbacks are a limited menu of funds and, in some plans, high fees.

The traditional IRA

An individual retirement arrangement, or IRA, is an account you open yourself at a bank or brokerage. You need taxable compensation (wages or self-employment income) to contribute, but a spouse with little or no income can contribute based on the working spouse's income if you file jointly.

For 2026 the IRA limit is $7,500, plus $1,100 more at 50 or older. That limit is shared between all your traditional and Roth IRAs, not per account. Contributions for a year can be made up to the tax-filing deadline the following spring.

Anyone with compensation can put money in a traditional IRA, but the deduction depends on whether you are covered by a workplace plan and on your income. If neither you nor your spouse is covered by a plan at work, the contribution is fully deductible at any income. If you are covered, the deduction phases out as modified adjusted gross income rises: for a single filer between $81,000 and $91,000, and for married couples filing jointly between $129,000 and $149,000. A separate, higher range applies when only your spouse is covered. Above the range you can still contribute, but without a deduction, which is usually less attractive unless it is part of a plan covered in Volume 2.

IRAs usually offer a much wider choice of investments than a workplace plan, often at very low cost.

The Roth IRA

A Roth IRA shares the IRA contribution limit, but it is funded with after-tax money and qualified withdrawals are tax-free. It has three features that make it unusually flexible.

Contributions can come back out. The amounts you put in (not the growth) can be withdrawn at any time without tax or penalty. Withdrawals are treated as coming from contributions first.

Growth is tax-free once qualified. Earnings can be withdrawn tax-free once you are 59½ and at least five tax years have passed since your first Roth IRA contribution. Taking out earnings before then can mean income tax and an additional 10% tax, with some exceptions.

No required withdrawals. The original owner never has to take money out, so the account can keep growing for as long as you live.

The catch is an income limit. For 2026, the amount you can contribute is reduced as modified adjusted gross income rises from $153,000 to $168,000 for single filers and from $242,000 to $252,000 for married couples filing jointly, and is zero above the range. Married people filing separately face a much lower range. Higher earners often use the backdoor Roth, which Volume 2 on this shelf explains step by step.

Getting money out: penalties and required withdrawals

These accounts are built for retirement, and the rules discourage early use.

Before 59½. Withdrawals from a 401(k) or traditional IRA before age 59½ are generally taxed as income and also face an additional 10% tax. There are exceptions, including disability, certain medical costs, and a series of substantially equal payments under rule 72(t). One exception applies only to workplace plans: if you leave your job in or after the year you turn 55, withdrawals from that employer's plan are not subject to the extra 10%. It does not apply to IRAs, which is one reason to think before rolling a 401(k) into an IRA in your mid-fifties.

Required minimum distributions. Traditional 401(k)s and IRAs must start paying out a minimum amount each year from a set age: 73 for people born from 1951 through 1959, and 75 for people born in 1960 or later. The amount is the prior year-end balance divided by an IRS life-expectancy factor, and it is taxed as income. Roth IRAs, and since 2024 Roth 401(k)s, have no required withdrawals for the original owner.

How to choose between Roth and traditional

There is no universal answer, but a few patterns hold for most people.

• Early career or a low-income year. Your tax rate is likely lower now than it will be later, which tends to favor Roth contributions.
• Peak earning years. If your current rate is high and you expect a lower rate in retirement, traditional contributions often come out ahead, and the deduction frees cash to save more.
• Uncertain. Splitting contributions between the two gives you tax diversification, so you can manage your taxable income in retirement by choosing which account to draw from.

Your current marginal rate is the place to start. The tax bracket calculator shows which bracket your next dollar of income falls in. If you expect to leave the United States, the comparison changes; the Roth or traditional if leaving the US calculator covers that case.