Planning for retirement in the U.S. can feel overwhelming, especially when you’re faced with terms like 401(k), Traditional IRA, and Roth IRA. These are among the most widely used retirement savings accounts — each with different tax advantages, contribution limits, and eligibility rules. Understanding how they work and which one fits your financial goals is crucial for building a secure future.
What Is a 401(k)?
A 401(k) is a retirement plan provided by your employer. You contribute a portion of your pre-tax income directly from your paycheck, which lowers your taxable income for the year. One of the biggest perks is the employer match: many companies will contribute a percentage of what you put in — often up to 3–6% of your salary — helping your savings grow faster.
Your investments grow tax-deferred, and you only pay taxes when you withdraw the money in retirement. In 2025, the contribution limit is $23,000, with an extra $7,500 allowed for those aged 50 and older (known as a catch-up contribution).
What Is a Traditional IRA?
A Traditional IRA (Individual Retirement Account) is a retirement savings account you can open on your own, regardless of your job. Contributions may be tax-deductible depending on your income and whether you’re covered by a workplace retirement plan.
Like a 401(k), your investments grow tax-deferred, and you’ll pay regular income tax on withdrawals. The annual contribution limit for a Traditional IRA in 2025 is $7,000, or $8,000 if you’re 50 or older. Unlike a 401(k), you have complete control over where you invest the funds — from mutual funds to stocks and bonds.
What Is a Roth IRA?
A Roth IRA flips the script. You contribute after-tax dollars, which means you don’t get a tax break now — but your money grows tax-free, and withdrawals in retirement are also tax-free, as long as the account has been open for at least five years and you’re over 59½.
This makes the Roth IRA especially appealing to younger workers or those who expect to be in a higher tax bracket in the future. However, eligibility is based on income. In 2025, single filers must have a modified adjusted gross income (MAGI) under \$161,000 to contribute fully, with the limit phasing out at \$176,000.
Key Considerations: Choosing the Right Account
1. Your Current vs. Future Tax Rate
If you expect to be in a lower tax bracket in retirement, a 401(k) or Traditional IRA might make more sense, since you’ll get a tax break now and pay less later. But if you think your income — and tax rate — will be higher in the future, a Roth IRA lets you pay taxes today and avoid them later.
2. Employer Match Opportunities
Always take full advantage of a 401(k) match if your employer offers one. That’s essentially free money and can significantly increase your retirement savings over time. Even if you also want an IRA, start with the 401(k) match.
3. Investment Flexibility
IRAs (both Traditional and Roth) often offer a broader range of investment choices compared to employer-sponsored 401(k)s. If you’re someone who prefers to choose your own mutual funds, ETFs, or even individual stocks, an IRA can offer that freedom.
4. Required Minimum Distributions (RMDs)
Both 401(k)s and Traditional IRAs require you to begin taking minimum distributions at age 73 (as of 2025), whether you need the money or not. Roth IRAs, on the other hand, do not require RMDs during your lifetime, making them a great tool for estate planning or long-term tax-free growth.
Can You Have More Than One?
Yes — and many people do. You can contribute to both a 401(k) and an IRA in the same year, as long as you stay within the contribution limits. In fact, diversifying between account types (pre-tax and after-tax) can give you more flexibility in retirement when it comes to managing your tax burden.
Final Thoughts
There’s no one-size-fits-all answer when it comes to retirement savings. Each account — 401(k), Traditional IRA, and Roth IRA — offers unique benefits. The best choice depends on your income level, tax situation, and long-term financial goals.
If you’re just getting started, begin with your employer’s 401(k), especially if there’s a match. Then consider opening an IRA (Traditional or Roth) to supplement your savings. A balanced approach can help you build a retirement plan that grows with you.
When in doubt, consult with a financial advisor who can tailor a strategy based on your personal circumstances. Retirement planning doesn’t have to be stressful — the right mix of tools can give you peace of mind and a strong financial future.
LEARN MORE
All information in this and other BOISLA articles is subject to change over time. Please check for updates directly with the institutions and companies mentioned. Approval is subject to the institution’s review.
REFERENCES:
Read more about finances in https://boisla.com/category/blog/
