Our stock market guide explained what to invest in. This guide covers where to hold it. US retirement accounts offer tax breaks that, over decades, can be worth hundreds of thousands of dollars, but they come with rules, limits, and trade-offs that confuse almost everyone at first.
It's step 4 of our Money & Investing learning path, after budgeting, paying off debt, and the stock market.
Why retirement accounts matter
Two things make retirement accounts powerful:
- Tax breaks. Money in these accounts can grow without being taxed every year on dividends and gains, and either your contributions or your withdrawals can be tax-free.
- Automation. Payroll contributions happen before you see the money, which makes saving the default.
Over long periods, avoiding annual taxes on growth adds up. And the employer match, where available, is the closest thing to free money in personal finance.
The accounts at a glance
| Account | Who offers it | Tax treatment | 2026 contribution limit |
|---|---|---|---|
| 401(k) (or 403(b), most 457(b)) | Employers | Traditional: tax-deductible now, taxed later. Roth version: after-tax now, tax-free later | $24,500 employee contributions |
| Traditional IRA | You open it at a brokerage | May be tax-deductible, depending on income and workplace plan coverage; taxed later | $7,500 (combined with Roth IRA) |
| Roth IRA | You open it at a brokerage | After-tax now; qualified withdrawals tax-free. Income limits apply | $7,500 (combined with traditional IRA) |
| HSA | With an eligible high-deductible health plan | Deductible in, tax-free growth, tax-free out for qualified medical costs | $4,400 self-only, $8,750 family |
| SEP IRA / Solo 401(k) | Self-employed people and small business owners | Traditional or Roth options, with higher limits | Varies; see our side income tax guide |
Catch-up contributions (2026): people 50 and older can add $8,000 to a 401(k) and $1,100 to an IRA. People aged 60 to 63 get a higher 401(k) catch-up of $11,250 instead of $8,000. HSA owners 55 and older can add $1,000.
These are the 2026 limits. The IRS usually announces the next year's limits in the fall, often in November, so check the IRS retirement plans pages for 2027 figures.
The employer match: never leave it on the table
Many employers add money to your 401(k) when you contribute. A common formula is "50% of contributions up to 6% of salary."
On a $60,000 salary with that match:
- You contribute 6% = $3,600 a year.
- Your employer adds 50% of that = $1,800 a year.
That $1,800 is an immediate 50% return on your $3,600, before any investment growth. Over time, the difference is large. Invested at a steady 7% a year for 30 years (a simplified illustration):
| Annual contributions | Value after 30 years |
|---|---|
| Your $3,600 only | about $340,000 |
| Your $3,600 plus the $1,800 match | about $510,000 |
The match alone accounts for about $170,000 in this example. If you can't afford much, contribute at least enough to get the full match. It's usually the first priority after a small starter emergency fund, even ahead of paying off moderate-interest debt.
Vesting: when the match becomes yours
Your own contributions are always yours. The employer's contributions may follow a vesting schedule, for example 20% per year over five years, or all at once after three years. If you leave before you're fully vested, you can lose the unvested portion. Check your plan's summary plan description, and look at your vesting date before you change jobs. Our career change guide covers this in the context of switching fields.
Traditional vs Roth: the core decision
Both accounts let your investments grow without annual taxes. The difference is when you pay income tax:
- Traditional: contributions usually reduce your taxable income now. You pay tax when you withdraw in retirement.
- Roth: you contribute money you've already paid tax on. Qualified withdrawals in retirement, including all the growth, are tax-free.
The surprising part: if your tax rate is the same now and in retirement, they come out exactly equal. Here's $5,000 of pre-tax earnings, invested at 7% for 30 years:
| Traditional | Roth (22% tax paid up front) | |
|---|---|---|
| Amount invested | $5,000 | $3,900 |
| Value after 30 years | about $38,061 | about $29,688 |
| Tax at withdrawal (22% rate) | about −$8,373 | $0 |
| You keep | about $29,688 | about $29,688 |
| If your retirement tax rate is 12% instead | about $33,494 | about $29,688 |
| If your retirement tax rate is 24% instead | about $28,927 | about $29,688 |
So the real question is: will your tax rate be higher or lower in retirement than it is now?
| Roth usually favored when… | Traditional usually favored when… |
|---|---|
| You're early in your career with a lower income now | You're in your peak earning years |
| You expect higher income or tax rates later | You expect a lower income in retirement |
| You want tax-free flexibility later | You need the tax deduction now to afford saving |
Many people split contributions between both, which is a reasonable hedge when you're unsure.
Roth rules worth knowing
- Income limits restrict who can contribute directly to a Roth IRA; check the current limits with the IRS. Roth 401(k)s don't have income limits.
- Your Roth IRA contributions (not earnings) can generally be withdrawn at any time without tax or penalty, which gives some flexibility. Earnings have their own rules, including a five-year rule.
- Starting in 2026, higher earners above an income threshold must make 401(k) catch-up contributions as Roth contributions.
Health Savings Accounts (HSAs)
If you have an HSA-eligible high-deductible health plan, an HSA can be uniquely tax-efficient:
- Contributions are tax-deductible (or pre-tax through payroll).
- Growth is tax-free.
- Withdrawals for qualified medical expenses are tax-free.
Unused money rolls over every year and stays yours if you change jobs. After age 65, you can withdraw for non-medical expenses too, paying income tax (like a traditional account) but no penalty. Before 65, non-medical withdrawals are taxed and usually hit with a 20% penalty.
Some people invest their HSA and pay current medical bills out of pocket, keeping receipts to reimburse themselves later. Our health literacy guide explains the insurance terms (deductible, out-of-pocket maximum) that decide whether a high-deductible plan makes sense for you.
Where should your next dollar go?
A common order of priority, after a starter emergency fund:
- 401(k) up to the full employer match.
- Pay off high-interest debt (our debt guide).
- Finish your emergency fund.
- HSA, if eligible.
- Roth or traditional IRA.
- More 401(k), up to the limit.
- Taxable brokerage account for anything beyond that, or for goals before retirement.
This isn't a law of nature. If your 401(k) has high fees or poor investment choices, an IRA may come before extra 401(k) money. If you're self-employed, a SEP IRA or Solo 401(k) replaces the workplace plan.
What to invest in inside the account
Opening the account is only half the job. Money can sit in cash inside a 401(k) or IRA and earn very little. Inside the account:
- Target-date funds are a one-fund option that gets more conservative as you approach retirement. Check the expense ratio.
- Broad, low-cost index funds, such as a total US market fund, a total international fund, and a bond fund.
- Avoid high-fee options where you have a choice. Fees compound just like returns, as our stock market guide shows.
Leaving a job: rollovers, not cash-outs
When you leave an employer, your 401(k) options usually include:
- Leave it in the old plan (if allowed).
- Roll it over to your new employer's plan.
- Roll it over to an IRA.
- Cash it out. This is usually the worst option.
Use a direct rollover, where the money moves straight from one account to another, to avoid tax withholding and mistakes. Cashing out before age 59½ generally triggers income tax plus a 10% additional tax, with some exceptions, and permanently removes that money from tax-advantaged growth.
Early withdrawals and later rules
- Before 59½: withdrawals from traditional accounts are generally taxed plus a 10% additional tax. Exceptions exist, such as certain disability situations, and the "rule of 55" for leaving an employer in or after the year you turn 55 (for that employer's plan). Many 401(k)s also allow loans, which must be repaid and can become taxable if you leave your job.
- Required minimum distributions (RMDs): traditional accounts generally require withdrawals starting at age 73 under current law (rising to 75 for people born in 1960 or later). Roth IRAs don't require withdrawals during the owner's lifetime.
Common mistakes
- Not contributing enough to get the full match.
- Leaving contributions in cash instead of investing them.
- Cashing out old 401(k)s when changing jobs.
- Ignoring vesting dates before resigning.
- Picking high-fee funds when low-cost index or target-date funds are available.
- Forgetting to update beneficiaries after marriage, divorce, or a birth.
- Contributing more than the limit, which can trigger penalties if not corrected.
Frequently asked questions
Should I choose a Roth or traditional 401(k)?
Compare your tax rate now with what you expect in retirement. If you expect it to be higher later, or you're early in your career, Roth often makes sense. If you're in your peak earning years, traditional often wins. Splitting between both is a reasonable hedge.
What happens to my 401(k) when I leave my job?
Your own contributions and vested employer contributions are yours. You can usually leave the money in the plan, roll it to your new employer's plan, or roll it to an IRA. Use a direct rollover, and avoid cashing out.
Can I have a 401(k) and an IRA at the same time?
Yes. The IRA limit is separate from the 401(k) limit. If you're covered by a workplace plan, your income determines whether traditional IRA contributions are tax-deductible.
What are the 401(k) and IRA limits for 2027?
The IRS usually announces them in the fall, often in November. Check the IRS retirement plans pages for the official figures.
Check your understanding
Answer each question from memory before opening it. Recalling, not rereading, is what makes learning stick (here's why).
1 What's the core difference between a traditional and a Roth account?
Traditional: contributions usually lower your taxes now, and withdrawals are taxed later. Roth: you contribute after-tax money now, and qualified withdrawals in retirement are tax-free.
2 If your tax rate is the same now and in retirement, which comes out ahead: traditional or Roth?
Neither. With the same tax rate, they end up equal. The choice depends on whether you expect your tax rate to be higher or lower in retirement.
3 Your employer matches 50% of contributions up to 6% of a $60,000 salary. How much do you need to contribute to get the full match, and what's the match worth each year?
6%, or $3,600 a year, which earns a $1,800 employer match.
4 What does a vesting schedule control?
When the employer's contributions become fully yours. If you leave before you're vested, you can lose some or all of the employer's contributions. Your own contributions are always yours.
5 Why is an HSA sometimes called the most tax-efficient account?
When used for qualified medical expenses, contributions are tax-deductible, growth is tax-free, and withdrawals are tax-free, so it can avoid tax at all three stages.
Where to go next
You've finished step 4 of the Money & Investing path. Next:
- How interest rates and bonds work: the other half of most retirement portfolios.
- Taxes on side income and freelancing: including SEP IRAs and Solo 401(k)s for the self-employed.
- How to afford a career change: protect your retirement accounts when you switch jobs.
Sources
- IRS: Retirement plans: contribution limits, catch-up rules, rollovers, early withdrawals, and RMDs.
- IRS: Health Savings Accounts (Publication 969): HSA eligibility, limits, and withdrawal rules.
- US Department of Labor: Employee Benefits Security Administration: your rights in employer retirement plans, including vesting.
- Investor.gov: fees, target-date funds, and investing basics.