Tax-advantaged retirement accounts are the most reliable way for ordinary earners to cut a lifetime tax bill. But the 401(k), Traditional IRA, and Roth IRA work differently, and the "best" one depends on your income, your employer, and a bet about future tax rates. This guide lays out the trade-offs and a priority order that works for most people.
The core question: pay tax now, or later?
Every retirement account is really an answer to one question — when do you want to be taxed?
- Traditional (401(k) or IRA): tax later. Contributions are pre-tax, lowering this year's taxable income. The money grows untaxed, and you pay ordinary income tax on withdrawals in retirement.
- Roth (IRA or 401(k)): tax now. Contributions are after-tax — no deduction today — but growth and qualified withdrawals are completely tax-free.
If your tax rate will be higher in retirement, Roth wins. If it will be lower, Traditional wins. Since most people can't know for certain, splitting between the two ("tax diversification") is a sound hedge.
2026 contribution limits
| Account | 2026 limit | Catch-up (50+) |
|---|---|---|
| 401(k) employee | $24,500 | +$8,000 (or +$11,250 at ages 60–63) |
| Traditional + Roth IRA (combined) | $7,500 | +$1,100 |
The 401(k) and IRA limits are independent, so a saver under 50 can put away up to $32,000 across both in 2026. The 401(k) calculator projects how those contributions and your employer match grow over time.
The employer match comes first
If your employer matches 401(k) contributions, that is free money and an instant return no investment can guarantee. A 50%-up-to-6% match means contributing 6% of pay earns an extra 3% — a 50% return on the spot. Always contribute at least enough to capture the full match before funding anything else.
A tax-now vs. tax-later example
Dana, in the 22% bracket, contributes $7,000. In a Traditional account she saves $1,540 in tax today; in 30 years at 7% growth the balance is about $53,000, taxed on withdrawal. In a Roth she gets no deduction now, but the same $53,000 is entirely tax-free. If Dana's retirement rate is also 22%, the two are mathematically equal. If she expects a higher rate later — likely for a young saver whose income will rise — the Roth's tax-free growth pulls ahead.
Income limits and the backdoor Roth
Roth IRAs phase out at higher incomes, and a Traditional IRA deduction can be lost if you (or a spouse) are covered by a workplace plan and earn above the threshold. High earners often use a "backdoor Roth" — contributing to a nondeductible Traditional IRA, then converting it to Roth — to access Roth benefits anyway. The 401(k) itself has no income limit, which is part of why it anchors most plans.
Don't forget the FICA wrinkle
A Traditional 401(k) avoids income tax but not Social Security and Medicare tax. That is why your W-2 shows Medicare wages (Box 5) higher than taxable wages (Box 1). Roth contributions are after-tax for income tax too, so they don't lower either figure — you are simply pre-paying the income tax for tax-free growth later.
Bottom line
Capture the match, then choose Roth or Traditional based on your current vs. expected future tax rate — leaning Roth when you are young or in a low bracket, Traditional when your rate is high today. Use the 401(k) calculator to see the long-run balance, and the paycheck calculator to see how a pre-tax contribution changes this week's take-home pay.
Withdrawals: RMDs and early-withdrawal penalties
The accounts differ at the end, too. Traditional 401(k)s and IRAs require Required Minimum Distributions (RMDs) beginning at age 73, forcing taxable withdrawals whether you need the money or not; Roth IRAs have no RMDs during the owner's lifetime, which makes them powerful estate-planning tools. Withdrawing before age 59½ from either type generally triggers a 10% early-withdrawal penalty plus income tax, though exceptions exist (a first home, qualified education, certain medical costs). Roth contributions — though not earnings — can always be withdrawn tax- and penalty-free, since they were already taxed, giving Roth IRAs extra flexibility for younger savers.
Key takeaways
- Capture the full employer match before funding anything else.
- Traditional = deduct now, tax later; Roth = tax now, tax-free later.
- Lean Roth when young or in a low bracket; Traditional when your rate is high.
- Traditional accounts have RMDs at 73; Roth IRAs do not.
- A traditional 401(k) lowers income tax but not Social Security/Medicare tax.