401Ks and IRAs: Your Retirement Account Guide

A Traditional 401K is offered by employers and lets you save money for retirement directly from your paycheck. The biggest advantage: you don't pay income tax on the money you contribute now.

Key features:

• Contributions reduce your taxable income this year
• You'll pay taxes when you withdraw the money in retirement
• 2025 contribution limit: $23,500 (excluding catch-up contributions for those age 50+)
• 10% penalty if you withdraw before age 59½ (with some exceptions)
• Many employers match your contributions (free money!)

You can invest your 401K money in various funds. For most people, a target date fund is the simplest choice. See investment recommendations here.

A Roth 401K works like a Traditional 401K, but with a key difference: you pay taxes on your contributions now, but pay no taxes when you withdraw the money in retirement.

Key features:

• Contributions are made with money you've already paid taxes on
• Both your contributions and all growth are tax-free when withdrawn in retirement
• Shares the same contribution limit as Traditional 401K: $23,500 in 2025
• Generally better if you expect to be in a higher tax bracket in retirement

Not all employers offer this option. If yours does, see our guide to choosing between Traditional and Roth.

A Traditional IRA (Individual Retirement Account) is something you open yourself, not through an employer. Like a Traditional 401K, you don't pay taxes on contributions now, but will pay taxes when you withdraw in retirement.

While I generally don't recommend this as your primary retirement account, it's useful in two specific cases:

• If you want to do a Backdoor Roth conversion (for higher-income earners)
• To consolidate old 401K accounts from previous employers

A Roth IRA is one of the most flexible and powerful retirement accounts available. You open it yourself (not through an employer), and it offers tax-free growth and withdrawals.

Key features:

• Contribute money you've already paid taxes on
• All growth and qualified withdrawals are completely tax-free
• 2025 contribution limit: $7,000 ($8,000 if over age 50)
• You can withdraw your contributions (but not earnings) penalty-free at any time
• Income limits: $146,000 for single filers, $230,000 for married filing jointly

If your income is too high to contribute directly, you can still use the Backdoor Roth method. See our recommendations for where to open a Roth IRA.