Saving for Retirement: 401(k)s, IRAs, and More

Defined-benefit pension plans aren't so common these days, and Social Security is unlikely to cover most people's retirement spending, so most of us need to do some saving and investing in our working years.

How much will depend on your goal. For most people, that might be having enough money to cover their expenses and a little left over for the fun stuff. Working with a professional planner or using an online retirement calculator can help you set a reasonable target.

The next step is to figure out where to put those savings.

Most people have two types of accounts available to them:

• Employer-sponsored workplace retirement accounts, such as 401(k)s and 403(b)s. The former are mostly found in private sector workplaces, while the latter are usually available to employees of educational organizations and non-profits.
• IRAs, whether a traditional IRA or a Roth IRA. Where 401(k)s are available through employers, IRAs are personal retirement savings accounts that you can open yourself through a brokerage, offering tax benefits and a range of investment options.

Whether you choose one or even multiple accounts will depend in part on what type of plan your workplace offers, your taxable income, and how much you're willing and able to save. Keep in mind that even those with access to employer-sponsored plans can still tap into IRA tax advantages to boost their savings and add flexibility to their portfolio.

If you have access to a 401(k) or similar employer retirement plan and your employer offers a matching contribution, the best place to start is to take advantage of the match. Let's say you make $100,000 per year, and your employer matches your 401(k) contributions dollar-for-dollar up to 6% of your salary (the average employer match is closer to 3%). In this case, you could save the first $6,000 of savings into your 401(k). You don't want to give up the free money your employer is offering as a match.

Plus, with a traditional 401(k), you make contributions with pre-tax dollars, which helps lower your taxable income. Your money—both contributions and potential earnings—grows tax-deferred until you withdraw it. At that time, withdrawals are taxed at your current tax rate. There may be state taxes as well.

That said, some employers also offer Roth 401(k) plans. These are funded with after-tax dollars—meaning there's no upfront tax benefit for contributing—but once you get to retirement, you can make qualified withdrawals of contributions and earnings totally tax-free.

A Roth 401(k) could make sense if you think your tax bracket will be the same or higher in retirement. (In other words, it's better to have your contributions taxed at a lower rate today, and then you can enjoy tax-free withdrawals when your income tax rate is higher in retirement.) If you're in a lower bracket when you retire, then a traditional 401(k) may end up being the better choice because you'd pay less tax on future withdrawals than you'd pay making post-tax contributions to a Roth 401(k) today.

After you fund your 401(k) enough to get the full company match, you can still set aside more money. For most people, if you have a 401(k) through your employer, it's a good idea to continue to contribute as much as you can afford or what you calculate you need to reach your retirement savings goals, up to the annual contribution limits. Keep in mind, there are higher contribution limits for older people.

If you don't have access to an employer-sponsored plan like a 401(k) or if you're already contributing up to the annual limit, a traditional or Roth IRA can help you increase your retirement savings.

The key difference between the two IRAs is when and how your money is taxed:

• With a traditional IRA, contributions are made on a pre-tax basis, depending on your modified adjusted gross income (MAGI). Contributions are generally tax deductible. (Though, if you or your spouse are covered by a workplace retirement savings plan, the tax deductibility of contributions will be subject to income limits.) You pay no taxes until you withdraw the money. If you withdraw money from a traditional IRA before age 59½, your deductible contributions and earnings (including dividends, interest, and capital gains) will be taxed as ordinary income. You may also be subject to a 10% penalty on early withdrawals, and a state tax penalty may also apply.
• With a Roth IRA, contributions are made with after-tax dollars, meaning there's no potential tax deduction in the year of the contribution, but qualified withdrawals are tax-free in retirement as long as you've held the account for at least five years from your first contribution and you're older than age 59½. Be aware that to contribute to a Roth IRA, your income must be below certain limits.

If you've maxed out your 401(k) and IRA contributions, congratulations. You're making significant steps to save for retirement.

If you want to save even more, consider a:

Traditional brokerage accounts don't offer the advantage of tax-free or tax-deferred investment earnings, but they can be relatively tax efficient if managed smartly. Consider putting your least tax-efficient investments (actively managed mutual funds, REITs, and other securities where income is taxed when earned, for example) in your tax-advantaged retirement accounts and more tax-efficient investments (passively managed funds, exchanged-traded funds, municipal bonds, and stocks held for more than one year, for example) in taxable brokerage accounts. Keep in mind, everyone's situation is different, so we recommend you reach out to a qualified advisor before making these decisions.

Even if you're covered by an employer plan and you're above the income limit for a Roth IRA or a deductible contribution to a traditional IRA, you could make a nondeductible (after-tax) contribution to a traditional IRA—but whether you should is a tough call.

You won't receive an up-front deduction, and any earnings will be taxed as ordinary income when you withdraw them. Alternatively, you could contribute to a nondeductible IRA and then turn around and convert that to a Roth IRA. The rules for conversions can be complex, so be sure to speak with an appropriate tax or financial professional before doing a conversion.

The advantage of tax-deferral rests primarily on the potential for tax-deferred compounding. But there are also ways you can invest to delay or defer taxes in taxable brokerage accounts by not trading actively and investing tax-efficiently.

If you're enrolled in a high-deductible health care plan that offers an HSA, consider using it to sock away extra money for future medical needs. Contributions are tax-deductible, earnings are tax-free, and withdrawals are tax-free when used for qualified medical expenses. (While HSA contributions, earnings, and qualified distributions are exempt from federal income tax, they may not, in whole or in part, be exempt from taxes in states.)

If you take the money for something other than a qualified medical expense, you will pay ordinary income taxes on the withdrawal and a tax penalty if you're under age 65. Once you reach age 65, you can withdraw HSA funds for non-medical expenses without paying the 20% penalty. You'll still owe federal income tax on those withdrawals, similar to a traditional IRA, but the penalty goes away. That means your HSA can function as a supplemental retirement account if needed.

Unlike IRAs or Roth IRAs, there are no income limits associated with contributions to an HSA. This means that higher wage earners can take advantage of a federally tax-deductible account. For 2026, annual contribution limits are $4,400 for an individual, $8,750 for a family. Plus, there's an extra $1,000 annual catch-up contribution for those 55 and over.

If you haven't started saving for retirement—or you're saving less than you should—get into the habit of "paying yourself first." That is, contribute as much of your earned income as you can afford to your retirement accounts before spending the funds on nonessentials. Now that you know more about which retirement accounts may make the most sense, it's time to put your savings plan to work.