Retirement accounts

Retirement accounts are financial vehicles designed to facilitate long-term savings for retirement, offering various tax advantages and regulatory frameworks. Primary options include 401(k) plans, IRAs, and Roth IRAs, each with distinct contribution limits, tax treatment, and withdrawal rules. For instance, 401(k) plans allow pre-tax contributions up to $24,500 annually (in 2026), with a total deferred plan limit of $72,000, and mandate required minimum distributions (RMDs) starting at age 73. Traditional IRAs offer tax-deferred growth, while Roth IRAs provide tax-free withdrawals under qualifying conditions.

The IRC §415(c), “Limitations on benefits and contributions under qualified plans” caps the total annual contributions to a defined contribution plan (e.g., 401(k)), including employee pre-tax, Roth, employer match, profit-sharing, and after-tax contributions. For after-tax contributions specifically, this is the only applicable limit, meaning you can contribute up to the difference between $72,000 and the sum of all other contributions. Importantly, this limit applies separately to each employer’s plan if you work for multiple employers with unrelated control groups, allowing you to maximize contributions across plans. However, exceeding this limit triggers penalties and corrective distributions.

Understanding these accounts’ nuances, including penalties for early withdrawals and strategic tax planning, is critical to optimizing retirement savings and ensuring financial security in later years. See overview of retirement accounts in Table 8.2.

Table 8.2: Overview of Retirement Accounts

Taxable account Pre-tax 401(k) Roth 401(k) Roth IRA taxation of contributions post-tax dollars pre-tax dollars post-tax dollars post-tax dollars taxation while growing tax dividends and capital gains incurred as it grows not taxed same not taxed taxation of withdrawals tax growth at capital-gains tax rates (if invested for > 1 yr) tax at income tax rates not taxed not taxed annual contribution restrictions none only wage and bonus income (no RSU income); elective deferral limited to $24,500 in 2026, plus employer match; all contributions combined capped at $72,000 (IRC §415(c)) same except $24,500 post-tax dollars plus employer match only earnings (includes RSU income); limited to $7,500 (+$1,100 if age 50+ in 2026), spousal IRA also possible withdrawal restrictions and requirements none unrestricted if age 59.5+, special rule for retired age 55+; required minimum distribution if age 73+; other special cases and penalties exist same, but no required minimum distributions during the owner’s lifetime (since 2024) unrestricted if age 59.5+; no minimum distribution; other special cases exist protection against creditors (seizure by others) none mostly protected same only for bankruptcy inheritance treatment basis changes to value at time of inheritance so taxes on prior growth are not paid 401(k)-plan specific same spouse gets regular IRA distribution rules; non-spouses must empty within 10 years charitable donations no taxes due plus charitable deduction permitted donate upon death or move to IRA and then, if age 70.5+, QCD same