Traditional 401(k): The Basics
A traditional 401(k) is offered through your employer. In 2026, you can contribute up to $23,500 per year ($31,000 if over 50). Contributions are pre-tax, meaning they reduce your taxable income today. If you earn $80,000 and contribute $10,000, you’re only taxed on $70,000. The catch? You’ll pay income tax on every dollar you withdraw in retirement. Best for: people who expect to be in a lower tax bracket in retirement.
Roth IRA: Tax-Free Growth Forever
A Roth IRA is funded with after-tax dollars — you pay taxes now but never again. In 2026, you can contribute $7,000/year ($8,000 if over 50) if your income is under $161,000 (single) or $240,000 (married). The money grows tax-free and withdrawals in retirement are completely tax-free. No required minimum distributions either. Best for: younger workers who expect higher income later, and anyone who wants tax flexibility in retirement.
The Employer Match: Always Take Free Money
If your employer offers a 401(k) match, that’s the single best investment you’ll ever make — it’s an instant 50-100% return. A common match is 50% of your contributions up to 6% of your salary. On a $80,000 salary, that’s $2,400/year in free money. Always contribute at least enough to get the full match before funding any other account. This is rule #1 of retirement planning.
The Optimal Contribution Order
Financial experts agree on this order: (1) 401(k) up to employer match. (2) Max out Roth IRA ($7,000). (3) Go back and max out 401(k) ($23,500). (4) HSA if eligible ($4,300). (5) Taxable brokerage account. This order maximizes tax advantages and free money. If you can only do steps 1 and 2, you’re still ahead of 85% of Americans.
Backdoor Roth: The High-Earner Loophole
Earn too much for a Roth IRA? The backdoor Roth is perfectly legal: contribute to a traditional IRA (no income limit), then immediately convert it to a Roth IRA. You pay taxes on the conversion, but then the money grows tax-free forever. Many employers also offer a mega backdoor Roth through after-tax 401(k) contributions, allowing up to $70,000/year into Roth accounts.
How to Choose: A Simple Decision Framework
Ask yourself one question: ‘Will my tax rate be higher or lower in retirement?’ If lower (most people who plan to spend less), lean toward traditional 401(k). If higher (young, early career, expect growth), lean toward Roth. The best strategy? Both. Having a mix of pre-tax and Roth accounts gives you maximum flexibility to manage your tax bill in retirement. Diversifying your tax exposure is just as important as diversifying your investments.