Most people build the bulk of their wealth inside a handful of tax-advantaged accounts, and the difference between using them well and using them carelessly can be enormous over a career. The accounts are not complicated once the logic is clear: some tax you now and free you later, some do the reverse, and a few rules govern how much you can add and when you must take it out.
This guide walks through the main accounts, the Roth-versus-traditional choice, contribution limits, rollovers, and the required withdrawals that surprise many retirees.
Roth vs. traditional
Every retirement account is one of two flavors. Traditional accounts give you a tax deduction now and tax your withdrawals later. Roth accounts give no deduction now but are completely tax-free in retirement, growth included. The choice comes down to one question: do you expect your tax rate to be higher now or in retirement? Roth wins if later, traditional if now.
Because future tax rates are unknown, many savers hold both, some Roth, some traditional, to hedge. Tax diversification gives you flexibility to manage your bracket in retirement.
401(k) vs. IRA
A 401(k) is offered through work, often with an employer match, and has high contribution limits. An IRA is opened on your own and offers wider investment choices but lower limits. A sensible order for most people: contribute to the 401(k) up to the full match, then fund an IRA, then return to the 401(k). Both come in traditional and Roth versions.
The employer match is the priority, an instant, guaranteed return covered in our paycheck and benefits guide.
Contribution limits
The government caps how much you can add each year, and the limits rise periodically with inflation. Workplace plans like 401(k)s allow far more than IRAs, and both offer extra catch-up contributions once you turn 50. High earners phase out of direct Roth IRA contributions, though a backdoor route, contributing to a traditional IRA and converting, remains available.
Check how much room you have with the IRA contribution calculator.
Rollovers, done right
When you change jobs, you can roll an old 401(k) into an IRA or a new employer's plan, keeping the money growing tax-deferred. Done as a direct rollover, trustee to trustee, it is seamless and tax-free. The mistake to avoid is taking the money as a check to yourself, which can trigger withholding and, if not redeposited in time, taxes and penalties.
Roll over directly, account to account. A retirement check made out to you is a tax trap waiting to spring.
Weigh a lump-sum option against rolling over with the lump-sum distribution calculator.
Required minimum distributions
Tax-deferred accounts cannot grow untaxed forever. Starting in your seventies, the IRS requires you to withdraw a minimum amount each year, a required minimum distribution, and taxes it as income. Miss it and the penalty is steep. Roth IRAs are exempt during your lifetime, one more reason they add flexibility. Planning withdrawals, and sometimes converting to Roth earlier, can smooth the tax hit.
Estimate yours with the required minimum distribution calculator, and see the multi-year picture with projected RMDs.
Frequently asked questions
Should I choose a Roth or traditional account?
Roth if you expect a higher tax rate in retirement, traditional if you expect a lower one. Since future rates are unknown, many people hold both to hedge and gain flexibility.
What is the difference between a 401(k) and an IRA?
A 401(k) is offered through work, often with a match and high limits; an IRA is opened on your own with lower limits but wider investment choice. A common order is 401(k) to the match, then IRA, then more 401(k).
How much can I contribute to retirement accounts?
Workplace plans like 401(k)s allow far more than IRAs, both rise with inflation over time, and both add catch-up room after age 50. High earners phase out of direct Roth IRA contributions.
How do I roll over an old 401(k)?
Use a direct rollover, moving the money trustee to trustee into an IRA or new plan, which is tax-free. Avoid taking a check to yourself, which can trigger withholding, taxes, and penalties.
What is a required minimum distribution?
Starting in your seventies, the IRS requires you to withdraw a minimum amount each year from tax-deferred accounts and taxes it as income. Roth IRAs are exempt during your lifetime.
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