Retirement Accounts Explained: 401(k), IRA and Roth IRA
Retirement accounts give you tax breaks for saving for the future. Here's how 401(k)s, traditional IRAs and Roth IRAs work, the 2026 contribution limits, how to choose between Roth and traditional, and what to invest in once your money is in the account.
By Pond.com editors Updated 4 min read
Quick answer
- A 401(k) is a workplace plan; an IRA is an account you open yourself. Both come in traditional and Roth versions.
- Traditional accounts give you a tax break now and are taxed when you withdraw; Roth accounts are taxed now and grow tax-free.
- For 2026, you can put up to $24,500 into a 401(k) and $7,500 into an IRA, with extra catch-up amounts from age 50.
- Always contribute enough to get your full employer match. It's free money.
- Inside the account, low-cost index funds or a target-date fund are a simple, diversified choice for most people.
Saving for retirement is one of the most important things you can do with your money, and retirement accounts make it much easier by giving you tax breaks. The two main types are workplace plans like the 401(k) and individual retirement accounts (IRAs). Both come in traditional and Roth versions.
This guide is general information, not financial advice. Contribution limits and tax rules change, so check current figures with the IRS or your plan.
The main types of retirement accounts
| Account | Who offers it | 2026 contribution limit | Catch-up (age 50+) |
|---|---|---|---|
| 401(k), 403(b) or 457 | Your employer | $24,500 | $8,000 ($11,250 at ages 60–63, if your plan allows) |
| Traditional IRA | You open it at a bank or brokerage | $7,500 (combined with Roth IRA) | $1,100 |
| Roth IRA | You open it at a bank or brokerage | $7,500 (combined with traditional IRA) | $1,100 |
| SIMPLE IRA or SEP IRA | Small employers or self-employed people | Varies; SEP limits are much higher | Varies |
Traditional vs Roth
| Traditional | Roth | |
|---|---|---|
| Tax break | Contributions lower your taxable income now | No tax break now |
| Growth | Tax-deferred | Tax-free |
| Withdrawals in retirement | Taxed as income | Tax-free, if rules are met |
| Required minimum distributions | Yes, starting at 73 (75 for people born in 1960 or later) | None for Roth IRAs or Roth 401(k)s during the owner's lifetime |
| Generally better if | You expect a lower tax rate in retirement | You expect the same or a higher tax rate later, or you're early in your career |
Many people split contributions between both types, which gives flexibility in retirement.
401(k) plans
- Contributions come straight out of your paycheck, which makes saving automatic.
- Employer matching: many employers add money when you contribute, for example 50 cents for every dollar up to 6% of your pay. Always contribute enough to get the full match. It's an instant return you won't find anywhere else.
- Vesting: you may need to stay a certain number of years before the employer's contributions are fully yours. Your own contributions are always yours.
- Investment choices are limited to the funds your plan offers. Look for low-cost index funds or a target-date fund.
IRAs
- Anyone with earned income can contribute to an IRA, even if they also have a 401(k).
- Roth IRA income limits: for 2026, the ability to contribute directly phases out between $153,000 and $168,000 of income for single filers, and $242,000 to $252,000 for married couples filing jointly.
- Traditional IRA deductions can be limited if you or your spouse are covered by a workplace plan and your income is above certain levels.
- You choose where to open one, usually at a brokerage, and you choose the investments.
A simple order for saving
- Contribute to your 401(k) up to the full employer match.
- Pay off high-interest debt, such as credit cards.
- Contribute to a Roth or traditional IRA.
- Go back to your 401(k) and increase contributions toward the maximum.
- Invest in a regular taxable brokerage account if you're still saving more.
What to invest in
Opening the account is only the first step; you also need to choose investments.
- Target-date funds automatically adjust from mostly stocks to more bonds as you approach retirement. Pick the one closest to the year you expect to retire.
- Low-cost index funds track a whole market, such as a total U.S. stock market or S&P 500 fund, and keep costs down.
- Watch the fees. An expense ratio of 0.1% versus 1% may sound small, but over decades it can cost tens of thousands of dollars.
- Don't panic in downturns. Markets go up and down. Staying invested and continuing to contribute has historically rewarded long-term investors.
Other things to know
- Saver's Credit: lower- and moderate-income workers may get a tax credit for contributing to a retirement account.
- Roth catch-up rule: starting in 2026, people who earned more than about $150,000 in Social Security wages the year before must make any 401(k) catch-up contributions as Roth contributions.
- Changing jobs: you can leave your 401(k) with your old employer, move it to your new plan, or roll it over to an IRA. Choose a direct rollover to avoid tax withholding.
- Beneficiaries: name beneficiaries on every account and keep them up to date.
Common questions
You can contribute up to $24,500 in 2026. If you're 50 or older, you can add an $8,000 catch-up contribution, and people aged 60 to 63 can contribute a higher catch-up of $11,250 if their plan allows it.
$7,500 across all your traditional and Roth IRAs combined, plus a $1,100 catch-up contribution if you're 50 or older. You need earned income at least equal to what you contribute.
For 2026, the ability to contribute directly phases out between $153,000 and $168,000 of modified adjusted gross income for single filers, and between $242,000 and $252,000 for married couples filing jointly.
Usually you'll pay income tax plus a 10% penalty on withdrawals before age 59½, with some exceptions. Roth IRA contributions (but not earnings) can be withdrawn at any time without tax or penalty. It's best to leave retirement money alone.
It's still yours. You can usually leave it in your old plan, move it to your new employer's plan, or roll it over to an IRA. Ask for a direct rollover so no taxes are withheld.