401(k) vs. Roth IRA vs. Traditional IRA: What's the Difference?
If you've been thinking about saving for retirement, you've likely come across three account types: the 401(k), the Roth IRA, and the Traditional IRA. They all help you build long-term savings, but they work differently. Understanding those differences is a useful first step before meeting with a retirement planning advisor in Eugene to build a plan around your specific goals.
This post covers how each account works, general eligibility considerations, and how contributions and withdrawals are typically treated from a tax standpoint. The right choice depends on your individual situation, and a personalized financial plan is the best way to figure out what fits.
Key Takeaway: 401(k)s and Traditional IRAs let you contribute pre-tax and pay taxes later in retirement. Roth IRAs flip that. You pay taxes now and withdraw tax-free later, with added flexibility like no RMDs and penalty-free access to your contributions. The best choice depends on your tax situation, income level, and long-term goals.
How Each Account Works
All three accounts are tax-advantaged. The key difference is timing: do you want the tax benefit now or later in retirement?
The 401(k)
A 401(k) is offered through your employer. Contributions come out of your paycheck before taxes, which reduces your taxable income for the year. Growth is tax-deferred, and withdrawals in retirement are taxed as ordinary income.
Key features include the following:
2026 contribution limit: $24,500 (under 50), $32,500 (age 50 or older) (IRS, IR-2025-111)
Many employers match a portion of contributions; the amount varies by employer and plan
Vesting schedules vary, so it is worth knowing your plan's terms
Withdrawals before age 59½ generally trigger a 10% penalty plus taxes (IRS, Publication 575)
Required minimum distributions (RMDs) begin at age 73
The Traditional IRA
A Traditional IRA is not tied to an employer. You open and manage it yourself. Like the 401(k), contributions may be tax-deductible, growth is tax-deferred, and withdrawals are taxed as ordinary income.
A few things to know:
2026 contribution limit: $7,500 (under 50); $8,600 for age 50 or older ($7,500 base + $1,100 catch-up) (IRS, IR-2025-111)
Deductibility depends on your income and whether you have a workplace plan
For single filers with a workplace plan, deductions phase out between $81,000 and $91,000 MAGI (IRS, IR-2025-111)
You can contribute up to April 15 of the following year, which allows for some year-end flexibility
RMDs begin at age 73
The Roth IRA
The Roth IRA works in reverse. You contribute after-tax dollars, so there is no upfront deduction. The payoff is that qualified withdrawals in retirement are tax-free, including growth.
Notable features:
2026 contribution limit: $7,500 (under 50), $8,600 (age 50 or older) (IRS, IR-2025-111)
Income limits apply: contributions phase out between $153,000 and $168,000 MAGI for single filers, and between $242,000 and $252,000 for married filing jointly (IRS, IR-2025-111)
Original contributions (not earnings or converted amounts) can generally be withdrawn at any time without taxes or penalties (IRS, Publication 590-B)
No RMDs during the account owner's lifetime (IRS, Publication 590-B)
Understanding the tax treatment of each account is where the decision often gets more nuanced.
The Tax Tradeoff, Explained Simply
With a 401(k) or Traditional IRA, you get a tax benefit today. Contributions may lower your taxable income now, and you pay taxes on withdrawals later in retirement.
With a Roth IRA, you pay taxes now and potentially owe nothing on qualified withdrawals later.
A general consideration: if you expect your tax rate to be lower in retirement, deferring taxes through a 401(k) or Traditional IRA may be worth exploring. If you expect your rate to be higher later, contributing to a Roth now could be a reasonable approach. This is worth working through with a knowledgeable financial planner.
RMDs are also part of the tax picture. Both the 401(k) and Traditional IRA require annual minimum withdrawals starting at age 73. Those distributions are taxable and can affect Medicare premiums and Social Security taxation. The Roth IRA has no such requirement during your lifetime, which gives you more control over timing.
Employer Matching Contributions: A Priority to Maximize
If your employer offers a 401(k) match, that is generally one of the first things worth prioritizing. Not contributing enough to capture the full match means leaving compensation on the table.
From there, many people direct additional savings toward a Roth IRA for potential tax-free growth, then return to their 401(k) for further contributions. The right sequence depends on your income, tax situation, and overall goals.
Can You Use More Than One Account?
Yes. You can contribute to a 401(k) and an IRA in the same year, within each account's limits. The $7,500 IRA limit applies across all IRA accounts combined (IRS, IR-2025-111).
Holding both pre-tax accounts (401(k) or Traditional IRA) and after-tax accounts (Roth IRA) can give you flexibility in retirement to help manage taxable income from year to year. This kind of tax diversification is one of the strategies that experienced Eugene retirement planners, like Ryan Lew, CFP®, and Ben Wenzel, CFP®, can help you think through based on your specific situation.
Not Sure Which Retirement Accounts Fit Your Situation?
The best strategy depends on factors unique to you: your income, your timeline, your tax picture, and your goals. Ryan Lew, CFP®, and Ben Wenzel, CFP®, at Tetralogy Financial Planning Group work with individuals and families across Eugene and the surrounding area to build retirement strategies that are thoughtful and personalized.
Thinking about the bigger picture? Learn more about the retirement milestones worth considering before you stop working.
If you'd like to talk through your options, we'd be glad to connect. Call us at (541) 600-3344 or schedule a time that works for you.
Frequently Asked Questions
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It depends on whether your employer has set one up. Small businesses are not required to offer a 401(k). If yours does not, a Traditional or Roth IRA can still be a solid option. Some small business owners also have access to a SEP-IRA or SIMPLE-IRA, which have their contribution structures.
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Self-employed individuals generally have several options, including a Solo 401(k), a SEP-IRA, or a Traditional or Roth IRA. The right fit depends on your income level, whether you have employees, and your tax planning goals. A financial planner can help you identify what may be available to you.
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There is a strategy sometimes called a backdoor Roth IRA. It involves making a non-deductible Traditional IRA contribution and converting it to a Roth. It can be an option for higher earners, but it comes with complexity, particularly if you have existing pre-tax IRA balances. The converted amount is treated as taxable income. Please consult a tax advisor before pursuing this approach.
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You generally have a few options: leave it with your former employer, roll it into a new employer's plan, roll it into an IRA, or cash it out. Cashing out typically means owing income taxes on the full amount, plus a 10% early withdrawal penalty if you are under 59½ (IRS, Publication 575). A rollover generally preserves the tax-deferred status of the funds.
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Oregon taxes distributions from 401(k)s and Traditional IRAs as ordinary income, at rates ranging from 4.75% to 9.9%. Qualified Roth IRA withdrawals are generally not subject to Oregon state income tax. This can be a meaningful factor in retirement income planning for Eugene residents. Please consult a tax advisor regarding your specific situation.
Disclosures
Tetralogy Financial Planning Group and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.
This material is for general information and educational purposes only and is not intended to provide specific advice or recommendations for any individual.
Investing involves risk including the loss of principal. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
A Roth IRA conversion is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you are required to take a minimum distribution in the year of conversion, it must be completed before converting. To qualify for tax-free withdrawals, you must generally be age 59½ and hold the converted funds in the Roth IRA for at least five years. Each conversion has its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions.
