401(k) and IRA Tips and Answers

A Quick Guide to Retirement Investing

This guide sets out many of the things you should know about selecting, investing in and rolling your 401(k) over into an Individual Retirement Account (IRA). If you don’t know where to start, you’re not alone. But whether you’re already retired or still building your career, we aim to answer some of the most pressing 401(k) and IRA questions.

401(k)s have gained popularity among many employers. This has shifted the responsibility for securing your retirement from your employer to you. It may sound like a burden to some, but we think you should approach it as an opportunity.

What Are 401(k)s?

A 401(k) is a retirement vehicle, typically set up by employers for their employees. Many employers encourage employees to save by matching their contributions over time. 401(k)s can be approached like any other long-term investment. You should achieve the right balance of good longer-term growth prospects and risk-appropriate strategy. 

It’s important to note there are two types of 401(k)s, traditional and Roth. You can have and contribute to both, which many do. An incentive to have both is tax diversification in the event of regulatory changes. After reading this guide you may decide one option is much better for you and decide to focus solely on it or have both. If your plan offers this option, you can split your yearly maximum between the two account types.

What Are IRAs?

An Individual Retirement Account (IRA) is a tax-advantaged retirement savings vehicle designed for individual taxpayers who do not have access to workplace retirement accounts such as a 401(k). An IRA allows for active management and a broader range of asset classes, such as individual stocks.

IRAs can have the same tax-deferred or tax-exempt status as 401(k)s, but they have different contribution limits. While there are various types of IRA’s for self-employed individuals and small business owners, individual taxpayers typically choose between a traditional or Roth IRA.

As of 2026, a traditional IRA allows most people to contribute up to $7,500 per year.1 If you are age 50 or older, a “catch-up” provision allows you to contribute another $1,100 for a total of $8,600 per year. A Roth IRA has the same annual contribution limits as a traditional IRA; the main difference is when you pay taxes. In most cases, contributions to traditional IRA’s are tax deductible and eligible withdrawals are treated as ordinary income in retirement. A Roth account is funded with post-tax money and eligible distributions are tax-free.
 

¹https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
 

Traditional Versus Roth 401(k)s

The main difference between these two types of 401(k)s are the way taxes are handled. It’s probable you made the decision as to which of these to use many years ago, but it’s worth understanding the difference because some issues apply to one and not the other.

Traditional

Traditional 401(k) contributions and earnings are not taxed until money is withdrawn. The advantage is a larger amount of money (remember, no taxes were taken out) can grow and compound over time. Because taxes are deferred, your reportable earned income is less for the year you make a contribution, meaning you could potentially pay less taxes in that contribution year.

However, you have to pay taxes when you withdraw funds. These withdrawals are taxed at your ordinary income rate after age 59.5, which for many retirees is lower than when they were working. Withdrawals prior to age 59.5 are usually subject to early withdrawal penalties.

Roth

When you have a Roth 401(k), you pay ordinary income tax on the contribution before you put the money in. Then, when you are eligible to take the money out at age 59.5, you pay no taxes. Those who prefer the Roth alternative may like knowing that whatever they take out is theirs, “tax free.” This may be a preferred option for some investors, depending on their personal situation. For others, the growth of their assets in a traditional 401(k) may make up for the taxes they pay when they take withdrawals from the account.