401(k) vs IRA vs Roth: Where Your Retirement Money Lives

Here's the thing about retirement accounts: most articles tell you which one to choose before explaining what you're choosing between. It's like being asked whether you want a sedan or an SUV before anyone explains what a car actually does.

So let's back up. Way up. Before we talk about contribution limits or tax advantages, let's answer the most basic question: What exactly ARE these accounts, and where does your money actually go?

Think of retirement accounts as specialized containers for your money. The container you choose determines three critical things: when you pay taxes, how much you can put in, and when you can take it out. That's it. That's the whole game.

A 401(k) is a retirement account that your employer sets up and manages. The name comes from the section of the tax code that created it (exciting, right?). Here's what makes it distinct:

How the money gets there: Your contributions come straight out of your paycheck before you ever see the money. You decide on a percentage or dollar amount, and your employer's payroll system automatically routes it to your 401(k) account.

Who holds your money: Your employer chooses a financial institution (like Fidelity, Vanguard, or Charles Schwab) to actually hold and invest your money. You don't get to pick the institution, but you do choose from the investment options they offer, usually a menu of mutual funds.

The employer match element: Many employers will match a portion of your contributions. This is literally free money. If your employer matches 50% of your contributions up to 6% of your salary, and you contribute 6%, they're adding another 3% on top. That money goes into the same account.

Contribution limits for 2024:

• If you're under 50: $23,000 per year
• If you're 50 or older: $30,500 per year (that extra $7,500 is called a "catch-up contribution")
• These limits are just for YOUR contributions. Employer matches don't count toward this limit

When you can access it: Generally, you can't touch this money until age 59½ without paying a 10% penalty on top of regular taxes. There are some exceptions for hardships, but they're limited. At age 73, you must start taking Required Minimum Distributions (RMDs), whether you need the money or not.

IRA stands for Individual Retirement Account, and that word "individual" is key. This is YOUR account, independent of any employer. You open it yourself, you manage it yourself, and you can keep it forever regardless of job changes.

How the money gets there: You transfer money from your bank account to your IRA. Unlike a 401(k), nothing happens automatically. You can make contributions anytime during the year, and even up until Tax Day (usually April 15) for the previous tax year.

Who holds your money: You choose the financial institution. Want Vanguard? Open an IRA there. Prefer Fidelity, Schwab, or even a bank? Your choice. You also have a much wider range of investment options than most 401(k) plans offer, including individual stocks, bonds, ETFs, and mutual funds.

No employer involvement: No matches, no company contributions, no workplace restrictions. This is entirely on you.

Contribution limits for 2024:

• If you're under 50: $7,000 per year
• If you're 50 or older: $8,000 per year
• These limits are MUCH lower than 401(k) limits

Income phase-out rules: If you or your spouse has a retirement plan at work, your ability to deduct Traditional IRA contributions phases out at higher income levels. For 2024, if you're single and covered by a workplace plan, the phase-out starts at $77,000 and completes at $87,000. For married couples filing jointly, it's $123,000 to $143,000.

When you can access it: Same as 401(k)s: generally age 59½ to avoid penalties, and RMDs start at 73. However, IRAs offer more flexibility for first-time home purchases ($10,000 lifetime limit) and qualified education expenses.

Both traditional 401(k)s and traditional IRAs share the same basic tax treatment, which works like this:

When you contribute: You get a tax deduction. If you're in the 22% tax bracket and contribute $10,000, you reduce your taxable income by $10,000, saving $2,200 in taxes that year. With a 401(k), this happens automatically through payroll. With a traditional IRA, you claim the deduction when you file taxes.

While the money grows: Zero taxes on growth. Your investments can earn dividends, generate capital gains, and compound for decades without triggering any tax bill. This is huge.

When you withdraw: Every dollar you take out counts as ordinary income and gets taxed at whatever your tax rate is in retirement. If you withdraw $50,000 in retirement and you're in the 12% bracket, you'll pay $6,000 in taxes that year.

The bet you're making: that you'll be in a lower tax bracket in retirement than you are now. For many people approaching retirement age, this might not be the slam dunk it once was, especially if you've saved well.

Here's where people get confused: Roth isn't a separate type of account. It's a tax treatment. You can have a Roth 401(k) or a Roth IRA. The "Roth" part just means the tax treatment flips completely upside down from traditional accounts.

Named after Senator William Roth who championed the legislation in 1997, Roth accounts work like this:

When you contribute: No tax deduction. You pay taxes on the money first, then contribute what's left. If you earn $10,000 and you're in the 22% bracket, you pay $2,200 in taxes, and $7,800 goes into your Roth account.

While the money grows: Still no taxes on growth (same as traditional accounts).

When you withdraw: Tax-free. Completely. Zero. If your $7,800 contribution grows to $100,000 over 30 years, you can withdraw all $100,000 in retirement without paying a penny in taxes. No RMDs during your lifetime either (at least for Roth IRAs, though Roth 401(k)s currently do have RMDs).

The bet you're making: that you'll be in the same or higher tax bracket in retirement, or that tax rates generally will be higher in the future.

Both are Roth accounts (tax-free in retirement), but the mechanics differ:

Roth 401(k):

• Offered through your employer (not all employers offer this option)
• Same $23,000/$30,500 contribution limits as traditional 401(k)
• No income limits, anyone can contribute
• Employer matches go into a traditional 401(k), not the Roth side
• Subject to RMDs starting at age 73
• You can split contributions between traditional and Roth 401(k), but combined total can't exceed the annual limit

Roth IRA:

• You open it yourself, independent of any employer
• Much lower $7,000/$8,000 contribution limits
• Income limits apply: For 2024, phase-out starts at $146,000 for single filers ($230,000 for married filing jointly)
• No RMDs during your lifetime
• Can withdraw your contributions (not earnings) anytime without penalty or taxes
• More flexible for early access and estate planning

You can absolutely have multiple retirement accounts. In fact, many people in their 50s and 60s have accumulated several accounts from different employers, plus their own IRAs. Here's what you need to know:

401(k) and IRA together: You can contribute to both. However, if you're covered by a 401(k) at work, your ability to deduct traditional IRA contributions may be limited based on your income (see the phase-out ranges mentioned earlier). Roth IRAs have separate income limits.

Multiple 401(k)s: If you change jobs mid-year, you can contribute to both employers' 401(k) plans, but your total contributions across ALL 401(k)s cannot exceed the annual limit ($23,000/$30,500 for 2024).

Traditional and Roth versions: The $7,000/$8,000 limit for IRAs is combined between traditional and Roth. You can't put $7,000 in each. But for 401(k)s, you can split contributions between traditional and Roth versions as long as the total doesn't exceed $23,000/$30,500.

Old 401(k)s from previous employers: These just sit there growing (or not growing, depending on your investments) until you decide to roll them over to an IRA, move them to your new employer's 401(k), or leave them where they are. You can't contribute to a 401(k) from a job you no longer have.

"My 401(k) is invested in stocks" - Not quite. Your 401(k) is the account type. WITHIN that account, you've chosen investments (likely mutual funds that own stocks). The account and the investments inside it are separate things.

"IRAs are safer/riskier than 401(k)s" - Nope. The account type doesn't determine risk. Your investment choices do. You can have a conservative 401(k) and an aggressive IRA, or vice versa.

"I can't contribute to an IRA if I have a 401(k)" - Wrong. You can contribute to both. The deductibility of traditional IRA contributions might be limited, but you can always contribute to a Roth IRA (if you're under the income limits) or make non-deductible traditional IRA contributions.

"Roth is always better for younger people, traditional for older people" - Oversimplified. It depends on your current vs. expected future tax bracket, not just your age. Some 55-year-olds in high tax brackets still benefit from Roth contributions.

"I lose my 401(k) if I leave my job" - Absolutely not. The money is yours. You just can't contribute to it anymore. You can leave it there, roll it to an IRA, or move it to your new employer's plan.

This might sound overly literal, but it's worth stating clearly: your retirement money lives at a financial institution in an account registered in your name (or your name and your employer's plan).

For 401(k)s, your employer chooses the institution, but the money is held in your individual account within the plan. If your company goes bankrupt, your 401(k) is protected because it's held separately from company assets. The same goes for IRAs, your money is held at the institution you chose (Vanguard, Fidelity, etc.) in an account with your Social Security number attached.

These accounts are protected by federal regulations. 401(k)s are protected under ERISA (Employee Retirement Income Security Act), which includes strict rules about how the money can be handled. IRAs at banks are FDIC-insured up to $250,000 (though most retirement money is invested, not just sitting in cash). IRAs at brokerages are protected by SIPC insurance up to $500,000 if the brokerage fails (though this doesn't protect against investment losses).

Your money doesn't disappear into some government vault. It's invested based on your choices, growing (or sometimes shrinking) based on market performance, and available to you according to the rules of the specific account type.

Understanding what these accounts fundamentally ARE helps you make better decisions:

Start with the 401(k) match: If your employer offers matching contributions, contribute enough to get the full match first. That's an immediate 50% to 100% return on your money, which you'll never beat elsewhere.

Then consider Roth vs. traditional: Now that you understand the tax treatment difference, you can think about your situation. High earner expecting a lower retirement income? Traditional might help now. Expecting similar or higher income in retirement? Roth starts looking better.

Use IRAs to supplement: After maxing out any 401(k) match, IRAs give you more control over investment choices and potentially lower fees. They're also more flexible for estate planning.

Don't let perfection paralyze you: The "perfect" strategy is less important than actually saving. Even if you're not sure whether traditional or Roth is optimal, contributing to either one beats not contributing at all.

Remember, these aren't competing options where you must choose one. Most people in their peak earning years (45-65) benefit from using multiple account types strategically. A 55-year-old might contribute to their 401(k) to get the company match, max out a Roth IRA for tax diversification, and then add extra 401(k) contributions beyond the match if they can afford it.

Important Disclaimer: This article is for educational purposes only and does not constitute financial advice. fidser. is not a certified financial planning firm, and this content should not be considered personalized financial advice. Every individual's financial situation is unique, and retirement planning involves complex decisions with long-term consequences. Before making any decisions about retirement accounts, contributions, or investment strategies, please consult with a qualified financial advisor or certified financial planner who can assess your specific circumstances, goals, and risk tolerance. Tax laws and contribution limits change regularly, so verify current regulations with a tax professional or the IRS.