Learning how to save for retirement can feel overwhelming. Although most people often think of selecting what to invest in as the most difficult part, simply trying to understand the different types of accounts available to you can feel intimidating at first. Thankfully, it only takes understanding of some small but key details to differentiate these accounts. Understanding these differences is what can transform simply saving your money into making your money do the most for you. Today, we’ll focus on the three core account structures that will be relevant to most investors:
- Traditional IRAs
- Roth IRAs
- 401(k)s
Key Features of Tax-Advantaged Investing
A key feature amongst these three account types is that they grant you the ability to better manage your tax liability throughout your lifetime when used appropriately. However, all three account types limit the total number of dollars you may contribute to these accounts every year.
Retirement Account Contribution Limits for 2026
- 401(k)$24,500 max ($32,500 if 50-59, $35,750 if 60-63)
- Traditional IRA$7,500 max ($8,600 if 50+)
- Roth IRA$7,500 max ($8,600 if 50+)
An important note is that contributions limits for Traditional IRAs and Roth IRAs are in aggregate. This means that if you contribute $7,000 to a traditional IRA and $500 to your Roth IRA, you have hit the $7,500 limit.
Understanding Individual Retirement Accounts (IRAs)
We’ll first cover Roth IRAs. These accounts can be established either through a bank or brokerage (Charles Schwab, Fidelity, etc.). When opened at a bank, you are typically limited to certain deposit-based investment options, like certificates of deposits (CDs) or high-yield savings accounts. IRAs opened instead at a brokerage have a wider, more general access to investment markets.
1. The Traditional IRA: The Original
A traditional IRA is an Individual Retirement Account you open on your own through a brokerage or bank.
The Pros of Traditional IRAs
- Broad Investment FlexibilityWide range of permissible assets. Individual stocks, ETFs, mutual funds and more are available to you.
- Possible Tax DeductionContributions to traditional IRAs are fully or partially tax deductible for the tax year you contributed them. Deduction eligibility depends on your filing status, income, and if you have an employer sponsored plan, like a 401(k).
The Cons of Traditional IRAs
- Unlike Roth IRAs, the future withdrawals from your traditional IRA will be subject to certain taxes.
- Funds withdrawn before age 59 ½ are subject to a 10% penalty (certain exceptions apply, see list of qualifying exceptions here).
- Once you reach the age of 73, the IRS requires you to withdraw a minimum amount every year, known as a “required minimum distribution” (RMD). Learn more about RMDs here.
2. The Roth IRA: The Tax-Free Favorite
The Roth IRA is another account established on your own but has some notable differences when compared to traditional IRAs. You contribute after-tax dollars, and in exchange, your money grows and stays tax free when you withdraw it in retirement.
The Pros of Roth IRAs
- Tax-Free Income LaterIf you expect to be in a higher tax bracket in the future, paying taxes now can be more beneficial.
- Flexible AccessYou can withdraw your original contributions (not the earnings/growth) at any time without penalties.
- No Required WithdrawalsUnlike 401(k)s and Traditional IRAs, Roth IRAs don’t force you to take required minimum distributions later in life.
The Cons of Roth IRAs
- Income RestrictionsNot everyone qualifies for a Roth IRA. For 2026, eligibility to contribute to a Roth IRA begins to phase out if your income exceeds $153,000 (single) or $242,000 (married filing jointly) and phases out entirely if your income exceeds $168,000 (single) or $252,000 (married filing jointly).
- Penalty RisksWithdraws taken before age 59 ½ that are not considered contributions are subject to a 10% penalty (certain exceptions apply, see list of qualifying exceptions here).
3. The 401(k): The Core Workplace Plan
A 401(k) is an employer-sponsored retirement plan and is often the easiest place to start. A 401(k) account can be established as either a traditional or Roth structure.
The Benefits of Workplace Savings
- Employer MatchThis is the biggest perk. Many employers match part of what you contribute (for example, 50% of the first 6%). If you’re not contributing enough to get the full match, you’re leaving free money behind!
- High Contribution LimitsIn 2026, you can contribute up to $24,500. If you’re 50 or older, you can contribute an additional $8,000 as a catch-up. Those ages 60-63 can contribute even more thanks to a new “super” catch-up, bringing the total to $35,750.
- Tax Savings TodayContributions are pre-tax if your 401(k) is established as a traditional 401(k), which lowers your taxable income now. You’ll pay taxes later when you withdraw the money in retirement.
- Out of Sight, Out of MindSince 401(k) contributions are deducted systematically from your paycheck, staying consistent with your contributions is made as easy as can be.
The Potential Drawbacks
Your investment choices are limited to what your employer offers. If the plan has higher fees or limited options, it may not be the best place for every dollar.
Conclusion: Building Your Wealth Advisory Strategy
If you want a lower tax bill today, the 401(k) and Traditional IRA are great tools. If you want tax-free income later, the Roth IRA is a great option. By using a mix of both, you create tax flexibility, giving yourself more control over your money not just now, but well into retirement. If you’d like to discuss handling your existing retirement accounts or need assistance establishing another, please contact Trajan Wealth today and get the most out of your savings!
