401(k), IRA, Roth — three accounts with hard names
All three are just savings accounts for retirement. One thing separates them: when you pay the tax.
401(k), IRA, Roth IRA. The names are the hardest part. All three are accounts you put money in for retirement. What makes them different from an ordinary savings account is a trade: the government gives you a tax break, and in return charges a penalty if you pull the money out early.
So why three names? Because of when you pay the tax. Get that straight and the rest is small print.
The break-now accounts
A 401(k) and a traditional IRA. Whatever you put in this year, you pay less tax on this year. Later, when you take it out, you pay tax on it then. The tax isn’t erased — it is postponed.
The nothing-later account
That’s the Roth IRA. You fund it with money you have already paid tax on, and when you take it out there is no tax at all — including on everything it grew into. If your income is high enough, this one may be closed to you.
Which is better comes down to a rough read. Paying a lot of tax right now? The break-now side usually wins. Earning less now than you expect to later? The nothing-later side usually does.
| Account | Who opens it | Going in | Coming out |
|---|---|---|---|
| 401(k) | Employer | Pre-tax (Roth option) | Taxed · RMDs |
| IRA | Individual | Deductible if eligible | Taxed · RMDs |
| Roth IRA | Individual | No deduction | Tax-free if qualified |
| SEP IRA | Business owner | Employer-funded | Taxed |
| SIMPLE IRA | Business owner | Employer contribution required | Taxed |
If you work for a company — check this first
Many employers add a match to your 401(k): you put in $100, the company adds $50. Not claiming it is simply giving up pay. One question to HR — “what’s our match?” — settles it.
One more thing. Money the company adds often requires a few years on the job before it is fully yours. If you are considering a move, check that alongside the offer.
If you run a business
On your own, or with a spouse, a SEP IRA is the simplest thing that works. With employees, a SIMPLE IRA takes less handling, and a 401(k) comes in as you grow.
People leave old accounts behind at former employers all the time. The money doesn’t vanish, but nobody is watching it. When you move it, send it account to account — never to your own checking first. The moment it lands there, tax is withheld and a deadline starts running.
How much can I put in?
There are limits, and they shift a little every year. That’s why the numbers aren’t printed here — the article would go stale. Take that year’s figures from the IRS site or your HR department.
The account and what goes in it are different questions
Everything above is about the type of account. What you put inside it to grow is a separate decision, and it is where paths diverge. I work with the option that does not lose principal — fixed and fixed indexed annuities — and do not handle stocks, funds, or other securities.