Roth IRA, traditional IRA, 401(k) and friends: US retirement accounts compared

This guide covers US accounts and general concepts. Contribution limits, income rules and tax treatment change regularly and depend on your situation, so check the IRS and a qualified tax professional before acting. Other countries have their own versions.

Traditional vs Roth: the core idea

• Traditional IRA or 401(k): contributions may be tax-deductible now; money grows tax-deferred; withdrawals in retirement are taxed as income.
• Roth IRA or Roth 401(k): contributions are made from money already taxed; growth and qualified withdrawals are tax-free.

Which is better depends largely on whether your tax rate is likely to be higher now or in retirement. Nobody can be certain, which is why some people hold both.

The alphabet

• 401(k): an employer-sponsored plan funded from your paycheque, often with an employer match. 403(b) is the equivalent for schools, hospitals and non-profits.
• IRA: an individual account you open yourself, in traditional or Roth form.
• SEP IRA: a retirement account for self-employed people and small-business owners, with higher contribution limits.
• HSA: a health savings account for people on a qualifying high-deductible health plan. Contributions, growth and qualified medical withdrawals can all be tax-advantaged, and unused money can stay invested.

Is it worth it?

Tax-advantaged accounts are usually worth using because of the tax savings, and an employer 401(k) match is effectively extra pay (subject to any vesting rules). The trade-off is limited access: taking money out early can trigger taxes and penalties, with exceptions. With a Roth IRA, you can generally withdraw your original contributions at any time, but earnings have conditions. Check current IRS rules before withdrawing.

Investing inside the account

These are wrappers. Opening one is only step one: you then choose what to hold inside it, such as index funds, target-date funds or individual stocks. A common mistake is leaving contributions sitting in cash.

How much do I need to retire?

It depends on your spending, other income such as Social Security or pensions, and how long you will live. Retirement calculators help you test assumptions, and a common planning rule of thumb is to aim for a portfolio large enough that a sustainable annual withdrawal covers your needs (see our guide on financial independence). Treat calculators as ways to explore scenarios.

After you retire

Investing does not stop at retirement. Money you will not need for ten or twenty years may still be invested for growth, while the next few years of spending is often kept in safer holdings. Rules on required withdrawals apply to some accounts.

A common order planners discuss: capture the match, then consider tax-advantaged accounts, then a regular taxable account. Check it against your own situation.