Types of Retirement Accounts: 401(k), IRA, Roth, and SEP

The 401(k) is the account most people encounter first. It comes through a job: you put in money from each paycheck, your employer often adds some on top, and the plan picks which funds you can hold. Knowing the tax treatment, limits, and withdrawal rules before you rely heavily on it will save you from surprises later.

A traditional 401(k) (opens in new tab) takes money from your paycheck before it's taxed, invests it, and taxes you when you withdraw in retirement. A Roth 401(k) flips that: you contribute after-tax dollars and withdrawals in retirement come out tax-free, assuming you meet the holding requirements.

Many employers match your contributions up to a certain percentage of your salary. That match is additional compensation. If you're not contributing enough to capture the full match, you give up free matching money. Most people don't realize this until someone points it out.

Contribution limits are substantially higher than IRAs. For 2026, the employee limit is $24,500 for people under 50 and $32,500 for people 50 and older (with the $8,000 catch-up). People aged 60 to 63 get an even larger catch-up of $11,250. These amounts adjust annually for inflation. Verify the current year's limits at IRS.gov (opens in new tab) before making contribution decisions.

But there's a real limitation: your investment menu. A 401(k) can only hold what your employer's plan administrator offers, typically a set of mutual funds and target-date funds. Not individual stocks. You can't take money out before age 59.5 without a 10% early withdrawal penalty in most cases, and you'll owe income tax on the withdrawal on top of that. At age 73, traditional 401(k) holders must begin required minimum distributions (RMDs), whether they need the money or not.

When you leave a job, you have three options for the old 401(k): leave it in your former employer's plan, roll it into a new employer's plan, or roll it into an IRA. Most people pick the IRA for wider investment options and fewer accounts to track. Cashing it out means paying income tax plus the 10% penalty. It's almost always the most expensive choice, and it's the one people regret.

A traditional IRA works on the same tax logic as a traditional 401(k): contributions may be tax-deductible now, and you pay income tax when you withdraw the money in retirement. "May" is doing real work in that sentence. Whether your contributions are deductible depends on your income and whether you or your spouse are covered by a workplace retirement plan. Above certain income thresholds, the deduction phases out. The IRA itself still functions the same way regardless of deductibility. A tax professional can tell you where your income falls relative to the current phase-out ranges.

For 2026, the annual contribution limit is $7,500 for people under 50 and $8,600 for people 50 and older. This is a combined limit across all of your IRAs, traditional and Roth together. You can't go over the combined limit across accounts. These limits adjust periodically for inflation, so check IRS Publication 590-A (opens in new tab) for the current year's rules before contributing.

Investment flexibility is where an IRA beats a 401(k). An IRA held at a brokerage can hold individual stocks, ETFs, bonds, mutual funds, whatever the custodian supports. No plan administrator limiting your menu. Withdrawals before 59.5 carry the same 10% penalty as a 401(k), with some exceptions. RMDs begin at 73.

And to be clear: loss of principal is possible regardless of account type. The tax wrapper doesn't protect against investment losses.

A Roth IRA (opens in new tab) is funded with after-tax dollars, so there's no deduction when you contribute. In exchange, qualified withdrawals in retirement are tax-free, including the growth. For someone investing over many years, that tax-free compounding can matter a lot. But "tax-free growth" describes a tax treatment, not a performance outcome. Investments in a Roth IRA can still lose value. The account type doesn't change the investment risk.

Roth IRAs have income limits that traditional IRAs do not. In 2026, the ability to contribute begins phasing out at $153,000 in modified adjusted gross income for single filers and $242,000 for married filing jointly. These thresholds adjust annually for inflation, so check the current year's limits at IRS.gov (opens in new tab) before contributing. Above the threshold, you can't contribute directly. There's a workaround called a "backdoor Roth IRA" (contribute to a non-deductible traditional IRA, then convert). Whether that makes sense for you depends on factors worth taking to your tax professional.

Roth IRAs have no required minimum distributions during your lifetime. You decide when and how to draw it down. You can also withdraw your contributions (not earnings) at any time without penalty, since you already paid tax on them. Annual contribution limits are the same as traditional IRAs, and that limit is shared across both account types.

A SEP IRA (opens in new tab) lets you contribute up to 25% of net self-employment income, capped at $72,000 for 2026, whichever is less. This cap adjusts annually for inflation. Verify the current limit at the IRS SEP page linked above. Contributions are pre-tax: deduct now, pay income tax on withdrawals in retirement. RMDs begin at 73. No Roth version exists.

Compared to a solo 401(k), the SEP IRA is simpler to open and maintain. No annual filing requirements as long as only you are contributing. But here's the catch: if you have employees, you must contribute the same percentage of their compensation as you contribute for yourself. Once you start hiring, that gets expensive fast.

If you want even higher contribution limits, or the ability to make both employee and employer contributions, a solo 401(k) may allow more total contributions in some situations. A tax professional can run that comparison against your actual income and business structure. (This gets into tax territory quickly, so don't try to calculate it yourself.)

A rollover IRA is a traditional IRA funded by rolling over money from a former employer's 401(k) or other qualified plan. The tax-deferred status carries over with no immediate tax bill. Do a direct rollover: the money goes from the 401(k) plan straight to the IRA without passing through your hands. If the check is made out to you instead of the IRA custodian, the plan withholds 20% for taxes, and you have 60 days to deposit the full amount (including that withheld 20% out of your own pocket) to avoid it being treated as a taxable distribution. A direct rollover avoids all of that. For the full step-by-step process, see how to roll over a 401(k) to an IRA.

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is an employer-sponsored plan for businesses with 100 or fewer employees. Think of it as a lighter-weight 401(k) with lower administrative costs. Contribution limits fall between a 401(k) and a regular IRA ($17,000 for 2026 employee deferral), and early withdrawals within the first two years carry a 25% penalty rather than 10%. If you work at a small business, this may be what your employer offers instead of a 401(k). That's fine. It's not the worst account in the room.

An inherited IRA applies when you inherit retirement account assets from someone who has died. The rules changed significantly with the SECURE Act in 2019 and the SECURE 2.0 Act in 2022. Most non-spouse beneficiaries now must deplete the account within 10 years, and the specific RMD rules within that window depend on whether the original owner had started taking distributions.

Get a tax professional involved here. The rules are detailed enough that getting them wrong has real, expensive consequences.

One thing the table can't show: none of these accounts protect against investment losses. The tax wrapper changes when you pay tax. It doesn't change whether the investments inside can lose value.

Narstar manages accounts held at Interactive Brokers: individual taxable brokerage accounts, joint accounts, Traditional IRAs, Rollover IRAs, Roth IRAs, SEP IRAs, trust accounts, and entity accounts. All of those are available at IBKR, and all of them can hold individual stocks, which is what our three model portfolios, including the Income and Growth portfolios, are built from.

We don't manage active 401(k) accounts at an employer's plan. Your current 401(k) stays where it is. We can't access it and we don't try to. Same for RSU accounts at employer brokerages. If you hold unvested RSUs or have an active 401(k) at your current job, those stay with your employer's system.

What we manage is separate: accounts you open at IBKR and fund yourself, whether that's a taxable account, a new IRA, or a rollover from an old 401(k) after you change jobs.

If you haven't chosen an adviser yet, the guide to finding a fee-only adviser covers what to look for and how to verify a registration. If you've got a mix of account types and want to understand how everything fits together, the contact form below is the right starting point. We'll explain what makes sense without selling you anything. The homepage shows what the advisory fee would be at any balance, and our full background and disclosures are on the about page.

Can I contribute to both a 401(k) and an IRA in the same year?

Yes. The limits are separate: $24,500 to the 401(k) and $7,500 to IRAs in 2026 (before catch-ups). One catch: if you're covered by a workplace plan, the traditional IRA deduction phases out above certain income levels. You can still contribute, you just might not get the deduction. A tax professional can tell you where your income lands.

Roth or traditional: which is better?

The honest answer is: it depends, and anyone who gives you a confident answer without knowing your tax situation is guessing. It comes down to whether your tax rate is higher now or likely higher in retirement. Traditional favors the first case; Roth favors the second. That depends on your income, your state, and what tax law looks like years from now. Worth taking to a tax professional with your actual numbers.

What happens to my 401(k) when I leave a job?

Four options: leave it where it is, roll it to the new employer's plan, roll it to an IRA, or cash it out. Cashing out is almost always the most expensive choice, and people still do it. The rollover guide covers the whole process step by step, including the tax traps.

Can I take money out before 59.5 without a penalty?

Usually there's a 10% penalty plus income tax, but exceptions exist. Roth IRA contributions (not earnings) come out anytime tax- and penalty-free. The "rule of 55" can allow penalty-free 401(k) withdrawals if you leave your job at 55 or later. Other exceptions cover specific situations like certain medical expenses and first-home purchases from an IRA. Check with a tax professional before withdrawing anything early. The rules are detailed, and the wrong call is expensive.