Most of us weren’t taught much about retirement accounts growing up, until we got our first job. Even then, we were handed a bunch of options in our onboarding paperwork and told to pick one.
I remember when I first started my banking career, my mentor told me “Do yourself a favor, and contribute 20% to your 401k. The company matches you 3% so that’s free money. Don’t touch this money”
Did I understand what I was doing exactly? No, but a few years later I had over $50k saved in my 401k account.
You might not have a mentor like I did, but that doesn’t mean you should remain ignorant of how retirement accounts work. Here’s a basic breakdown of your options in the retirement world:
| 401(k) | Traditional IRA | Roth IRA | |
|---|---|---|---|
| Who offers it | Through your employer | Opened on your own or financial advisor | Opened on your own or financial advisor |
| Contributions | Before taxes | Before taxes | After taxes |
| When you can take money | Age 59 ½ and you pay taxes | Age 59 ½ and you pay taxes | 59 ½ generally tax-free |
A 401k is opened through your employer and whatever you contribute is taxed only when you withdraw the money. The money you contribute is also not counted in your taxable income for the year so that’s a plus. The perk here is that if your employer offers a match, that’s essentially “free” money. When you leave your company some options include: leaving the money in your former employer’s plan, if permitted; rolling over the assets to his/her new employer’s plan, if one is available and rollovers are permitted; Rolling over to an IRA; or cashing out the account value.
An IRA is opened on your own and your employer isn’t involved, but you’re limited on how much you can contribute. The current contribution limit in 2026 is $7,500 per year if you’re under age 50 and $8,600 if you’re age 50 or older. With a traditional IRA, you may qualify for a tax deduction, and your money grows tax-deferred until you withdraw it.
If you go the Roth IRA route, you don’t get the upfront tax benefits from Uncle Sam. Instead, you contribute money that’s already been taxed. Your investments grow tax-free, and as long as you meet the requirements, generally being at least age 59½ and satisfying the holding period, qualified withdrawals are tax-free. The contribution limits are the same as a traditional IRA, but there are income limits that determine whether you can contribute directly. If you’re a high roller, this may not be an option for you.
There’s no right or wrong answer when it comes to choosing a retirement account. It all depends on your employment/financial situation and what you value.
If you’re self-employed, good news, there’s even more options for you but we don’t have time to go over those in this post. Check our other blog posts or reach out to our team for personalized advice HERE
If you’re wondering what’s the best option for you, speak to your financial advisor, accountant or speak to one of our advisors click here and schedule a quick 20 minute consultation