Understanding Retirement Accounts

These are retirement accounts with tax advantages that help your money grow faster.

401(k)

• Offered through your employer
• You contribute pre-tax money (lowers your taxable income now)
• Money grows tax-free
• You pay taxes when you withdraw in retirement
• 2025 contribution limit: $23,000/year
• Free money alert: Many employers match contributions (like 50% of the first 6% you contribute). Always get the full match - it's literally free money!

Traditional IRA

• Individual Retirement Account (you open it yourself)
• Contributions may be tax-deductible
• Money grows tax-free
• You pay taxes on withdrawals in retirement
• 2025 contribution limit: $7,000/year

Roth IRA

• You contribute after-tax money (no tax deduction now)
• Money grows tax-free
• Best part: Withdrawals in retirement are 100% tax-free
• Same $7,000/year limit
• Income limits apply (can't contribute if you make too much)

Which Should You Use?

Priority Order

1. Contribute to 401(k) up to company match (free money!)
2. Max out Roth IRA ($7,000)
3. Go back and max out 401(k) ($23,000)

Roth vs Traditional

If you expect to be in a higher tax bracket in retirement, choose Roth. If you're in a high bracket now and expect lower taxes later, choose traditional. When in doubt, young people usually benefit more from Roth.

The Catch

You generally can't touch this money until age 59½ without penalties (some exceptions exist).

Plan your retirement savings with our Retirement Calculator!