Saving for retirement is one of the most important financial goals you’ll ever pursue.
The U.S. tax code offers several powerful, tax-advantaged vehicles to help you build wealth for your future—most notably the 401(k), traditional IRA, and Roth IRA. But what if you don’t have access to a 401(k) or your income is too high for a Roth IRA?
I’m going to cover how these accounts work, how to use them effectively, and what alternatives exist if you don’t qualify.
The Big Three: 401(k), Traditional IRA, and Roth IRA
401(k): The Employer-Sponsored Workhorse
A 401(k) and the closely related 403(b) for employees of certain nonprofits, schools or religious organizations, is an employer-sponsored retirement plan that lets you contribute a portion of your paycheck to a tax-advantaged investment account. Many employers offer matching contributions, making it one of the most powerful savings tools available.
Key Features:
· Tax Benefits: Contributions are pre-tax, reducing your taxable income. Investments grow tax-deferred.
· Contribution Limits (2025): $23,500 (under 50); $31,000 (50+ with $7,500 catch-up); extra catch-up for ages 60-63.
· Employer Match: Many employers match a percentage of your contributions.
· Investment Choices: Typically mutual funds, target-date funds, and sometimes company stock.
· Withdrawals: Taxed as ordinary income; 10% penalty for withdrawals before age 59½ (with exceptions).
· Required Minimum Distributions (RMDs): Begin at age 73.
Example: If you earn $80,000 and contribute $10,000 to your 401(k), your taxable income drops to $70,000, and your investments grow tax-deferred until you withdraw in retirement.
If you change jobs, you have a few different options to consider for how to handle your funds:
· Leave funds in the old 401(k) (if balance > $5,000)
· Roll over to your new employer’s 401(k)
· Roll over to a traditional or Roth IRA
· Cash out (not recommended—penalties and taxes apply)
Traditional IRA: Tax-Deferred Flexibility
A Traditional IRA is an individual account you open yourself, not tied to an employer. It offers tax-deferred growth and, in many cases, tax-deductible contributions.
Key Features:
· Tax Benefits: Contributions may be tax-deductible (subject to income limits if you or your spouse are covered by a workplace plan); investments grow tax-deferred. Deductibility is subject to income limits.
· Contribution Limits (2025): $7,000 (under 50); $8,000 (50+).
· Eligibility: Anyone with earned income can contribute, regardless of income, but deductibility may be limited.
· Withdrawals: Taxed as ordinary income; 10% penalty for withdrawals before age 59½ (with exceptions).
· RMDs: Begin at age 73.
Example: You contribute $7,000 to a traditional IRA. If deductible, your taxable income drops by $7,000, and your investments grow tax-deferred until you withdraw in retirement.
Roth IRA: Tax-Free Growth for the Long Haul
A Roth IRA allows you to contribute after-tax dollars and enjoy tax-free growth and withdrawals in retirement.
Key Features:
· Tax Benefits: Contributions are not deductible, but qualified withdrawals (after age 59½ and 5-year holding period) are tax-free. Especially advantageous for younger investors who expect their tax rate to increase later in life.
· Contribution Limits (2025): $7,000 (under 50); $8,000 (50+). Limits apply across all IRAs.
· Eligibility: Income limits apply (MAGI phase-out begins at $150,000 for singles, $236,000 for married filing jointly in 2025).
· Withdrawals: Contributions can be withdrawn any time tax- and penalty-free; earnings are tax- and penalty-free if qualified. No RMDs during your lifetime.
· Funding Sources: Regular contributions, spousal contributions, rollovers, conversions.
Example: You contribute $7,000 after-tax to a Roth IRA. Your investments grow tax-free, and you can withdraw all earnings tax-free in retirement.
| Retirement Plans in Brief | |||
| Feature | 401(k) | Traditional IRA | Roth IRA |
| Who can contribute | Employees (via employer) | Anyone with earned income | Anyone with earned income (subject to income limits) |
| Contribution limit (2025) | $23,500 (<50); $31,000 (50+) | $7,000 (<50); $8,000 (50+) | $7,000 (<50); $8,000 (50+) |
| Tax treatment | Pre-tax contributions; tax-deferred growth; taxed at withdrawal | Pre-tax (if deductible); tax-deferred growth; taxed at withdrawal | After-tax contributions; tax-free growth and withdrawals |
| Employer match | Often | No | No |
| RMDs | Yes (age 73) | Yes (age 73) | No |
| Early with- drawal penalty | 10% before 59½ | 10% before 59½ | Contributions: none; earnings: 10% before 59½ +5 years |
| Income limits | No | No for contributions; yes for deduction | Yes for contributions |
| Investment choices | Limited (plan menu) | Broad (any broker) | Broad (any broker) |
| Source: Cabot Wealth Network (www.CabotWealth.com) | |||
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4 Tips to Maximize Your Benefits
1. Maximize Employer Match in Your 401(k). Contribute at least enough to get the full employer match—it’s free money. Increase your contribution rate over time, especially after raises or bonuses before your lifestyle has adjusted to the new higher income.
2. Consider a Roth IRA for Tax-Free Growth. If eligible, fund a Roth IRA for tax-free withdrawals and no RMDs. Roth IRAs are especially valuable if you expect to be in a higher tax bracket in retirement.
3. Use an IRA for Tax Deductions or Additional Savings. If you don’t have a 401(k) or want to save more, contribute to a traditional IRA. If you’re not eligible for a deduction, consider nondeductible contributions or a backdoor Roth IRA. (see below)
4. Coordinate Contributions. You can contribute to both a 401(k) and an IRA in the same year, subject to their respective limits.
What If You Don’t Qualify?
Certain high earners and self-employed people are not eligible to participate in some or all of “the big 3” we’ve just been discussing. In that case, there are still some options to consider that can help you save for retirement.
1. Backdoor Roth IRA: For High-Income Earners
If your income is too high for direct Roth IRA contributions, you can use the backdoor Roth IRA strategy. Here’s how it works:
· Make a nondeductible contribution to a traditional IRA.
· Convert the amount to a Roth IRA soon after (ideally before it earns investment gains).
· Pay taxes only on any gains between contribution and conversion.
Example: You earn $200,000 (single), above the Roth IRA income limit.
· Contribute $7,000 post-tax to a traditional IRA.
· Convert to Roth IRA; pay tax only on any earnings before conversion.
· File IRS Form 8606 to report the conversion.
Caution: If you have other pre-tax IRA balances, the pro-rata rule applies, potentially increasing your tax bill.
2. Roth 401(k): No Income Limits
Some employers offer a Roth 401(k), which combines the high contribution limits of a 401(k) with the tax-free withdrawals of a Roth IRA.
| Feature | Roth 401(k) |
| Contribution limit (2025) | $23,500 (<50); $31,000 (50+) |
| Tax treatment | After-tax contributions; tax-free growth and withdrawals |
| Employer match | Yes (matched contributions go into traditional 401(k)) |
| Income limits | None |
| RMDs | Yes (unless rolled to Roth IRA) |
Example: You earn $300,000 and your employer offers a Roth 401(k). You can contribute up to $23,500 (or $31,000 if you’re over age 50) regardless of income.
3. For the Self-Employed and Small Businesses
SEP IRA (Simplified Employee Pension)
· For self-employed, freelancers, or business owners.
· Employer-only contributions (up to 25% of compensation, max $70,000 in 2025).
· Contributions are tax-deductible; grows tax-deferred.
· Withdrawals taxed as income; 10% penalty before 59½.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
· For businesses with ≤100 employees.
· Both employer and employee can contribute.
· Employee limit: $16,500 ($20,000 if 50+ in 2025; $21,750 if between 60 and 63; these numbers also vary by employer size).
· Employer must match up to 3% of compensation or contribute 2% for all employees.
· Early withdrawals may incur a 25% penalty if taken within first two years.
| Feature | SEP IRA | SIMPLE IRA |
| Who can open | Self-employed, any size business | Small businesses (≤100 employees) |
| Contribution limit | Up to 25% of comp. ($70,000 max) | $16,500 ($20,000 if 50+) |
| Who contributes | Employer only | Employer and employee |
| Roth option | No | No |
| Early withdrawal | 10% penalty before 59½ | 25% penalty in first 2 years |
4. Health Savings Account (HSA): Triple Tax Advantage
If you have a high-deductible health plan (HDHP), you can contribute to an HAS to get tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses
After age 65, you can use HSA funds for any purpose (these will be taxable if not for medical expenses), making it a powerful supplemental retirement account.
5. Taxable Brokerage Accounts
If you’ve maxed out all tax-advantaged options, invest in a regular brokerage account. You have no limits to be concerned about and have maximum flexibility.
These have no contribution limits or income restrictions. Capital gains and dividends are taxable, but long-term capital gains are taxed at favorable rates. You also have no early withdrawal penalties or RMDs. And you can always use tax-efficient index funds or ETFs to minimize taxes.
Contribution Limits (as of 2025)
| Account Type | Under Age 50 | Age 50+ |
| 401(k) | $23,500 | $31,000 |
| Roth 401(k) | $23,500 | $31,000 |
| Traditional IRA | $7,000 | $8,000 |
| Roth IRA | $7,000 | $8,000 |
| SIMPLE IRA | $16,500 | $20,000 |
| SEP IRA | $70,000 | $70,000 |
| HSA (Individual) | $4,300 | $5,300* |
| HSA (Family) | $8,550 | $9,550* |
* HSA catch-up contributions begin at age 55+, not age 50.
Scenario 1: Employee with 401(k) and IRA Options
· Age: 35
· Salary: $90,000
· Employer offers 401(k) with 4% match
· Eligible for both traditional and Roth IRA
Strategy:
1. Contribute at least 4% to 401(k) to get full match.
2. Max out Roth IRA ($7,000).
3. Increase 401(k) contributions as budget allows.
Scenario 2: High Earner, No Access to Roth IRA
· Age: 45
· Salary: $250,000
· Employer offers 401(k) and Roth 401(k)
Strategy:
1. Max out Roth 401(k) ($23,500).
2. Use backdoor Roth IRA ($7,000).
3. Invest additional savings in a taxable brokerage account.
Scenario 3: Self-Employed Consultant
· Age: 40
· Net income: $120,000
Strategy:
1. Open SEP IRA; contribute up to 25% of net income (max $30,000).
2. Contribute to Roth IRA if eligible.
3. Use HSA if enrolled in HDHP.
4. Invest extra savings in a taxable account.
What to Do If You Don’t Qualify for a 401(k) or Roth IRA
1. Open a Traditional IRA. No income limits for contributions and if you’re not covered by a workplace plan, contributions are deductible regardless of income.
2. Use the Backdoor Roth IRA. Make nondeductible traditional IRA contributions, then convert to Roth.
3. Maximize HSA Contributions. If you have a high-deductible health plan, use an HSA for retirement savings.
4. Open a SEP or SIMPLE IRA. Self-employed or small business owners can save much more than with a traditional or Roth IRA.
5. Invest in a Taxable Brokerage Account. Use low-cost, tax-efficient index funds or ETFs with the advantages of no contribution or income limits and flexibility for withdrawals.
Which Account Is Right for You?
| Situation | Best Option(s) |
| Employer offers 401(k) | Max out match, then IRA/Roth IRA |
| High income, no Roth IRA access | Roth 401(k), backdoor Roth IRA, taxable account |
| Self-employed | SEP IRA, Solo 401(k), SIMPLE IRA, Roth IRA (if eligible) |
| No employer plan, moderate income | Traditional IRA, Roth IRA, HSA, taxable account |
| Maxed out all tax-advantaged plans | Taxable brokerage account |
Withdrawal Rules and Tax Considerations
| Account Type | Contributions | Growth | Withdrawals | Early Withdrawal Penalty | RMD |
| 401(k) | Pre-tax | Tax-deferred | Taxed as income | 10% before 59½ | Yes |
| Roth 401(k) | After-tax | Tax-free | Tax-free (qualified) | 10% before 59½ | Yes* |
| Traditional IRA | Pre-tax (if de-ductible) | Tax-deferred | Taxed as income | 10% before 59½ | Yes |
| Roth IRA | After-tax | Tax-free | Tax-free (qualified) | None for contributions; 10% on earnings before 59½/5 years | No |
| SEP/SIMPLE IRA | Pre-tax | Tax-deferred | Taxed as income | 10% (SEP), 25% (SIMPLE, first 2 years) | Yes |
| HSA | Pre-tax | Tax-free | Tax-free (medical); taxed as income otherwise | 20% before 65 (non-medical) | No |
| Taxable Account | After-tax | Taxable | Capital gains/dividends taxed | None | No |
* Roth 401(k) RMDs can be avoided by rolling over to a Roth IRA before RMD age.
Tips for Maximizing Retirement Savings
1. Start Early: Time and compounding are your best friends.
2. Maximize Tax-Advantaged Accounts: Prioritize accounts with the best tax benefits and highest contribution limits.
3. Don’t Neglect Alternatives: If you don’t qualify for certain accounts, use backdoors, HSAs, or taxable accounts.
4. Revisit Annually: Account rules and limits change; review your strategy each year.
5. Coordinate with a Professional: Especially for complex strategies (backdoor Roth, SEP/SIMPLE IRAs), consult a tax or financial advisor.
Whether you’re just starting your career, earning a high income, or working for yourself, there’s a retirement savings strategy for you. The 401(k), traditional IRA, and Roth IRA form the backbone of most plans, but alternatives like the backdoor Roth IRA, Roth 401(k), SEP/SIMPLE IRAs, HSAs, and taxable accounts ensure that everyone can build a secure future.
By understanding the rules, maximizing contributions, and investing wisely, you can take full advantage of the tools available—regardless of your situation.
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