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

A traditional 401(k) (opens in new tab) takes money from your paycheck before it is 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 are tax-free, assuming you meet the holding requirements. Many employers offer a match on contributions up to a certain percentage of your salary. That match is additional compensation. Not contributing enough to get the full match means forgoing part of your total compensation.

The contribution limits are substantially higher than IRAs. For reference, the 2025 employee limit was $23,500 for people under 50 and $31,000 for people 50 and older (with catch-up). These amounts adjust annually for inflation. Verify the current year's limits at IRS.gov (opens in new tab) before making contribution decisions.

The significant trade-off is the investment menu. Your 401(k) can only hold what your employer's plan administrator offers, which is typically a set of mutual funds and target-date funds, not individual stocks. You cannot take money out before age 59.5 without a 10% early withdrawal penalty in most cases, and you will 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 roll it to an IRA to get wider investment options and consolidate accounts. Cashing it out means paying income tax and the 10% penalty. That is almost always the most expensive option.

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. The key word is "may." Whether your contributions are deductible depends on your income and whether you or your spouse are covered by a workplace retirement plan. If you are covered by a plan at work and your income is above certain thresholds, the deduction phases out. The IRA itself still functions the same way whether contributions are deductible or not. Consult a tax professional for where your income falls relative to the current phase-out ranges.

For reference, the 2025 annual contribution limit was $7,000 for people under 50 and $8,000 for people 50 and older. This is a combined limit across all of your IRAs: traditional and Roth together. You cannot contribute more than the combined limit across accounts. IRA limits adjust periodically for inflation. Check IRS Publication 590-A (opens in new tab) for the current year's contribution rules before contributing.

The major advantage of a traditional IRA over a 401(k) is investment flexibility. An IRA held at a brokerage can hold individual stocks, ETFs, bonds, mutual funds, or whatever the custodian supports. There is 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. Loss of principal is possible regardless of account type; the tax wrapper does not protect against investment losses.

A Roth IRA (opens in new tab) is funded with after-tax dollars. There is no deduction when you contribute. The trade-off is that 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 does not change the investment risk.

Roth IRAs have income limits that traditional IRAs do not. For reference, in 2025 the ability to contribute began phasing out at $150,000 in modified adjusted gross income for single filers and $236,000 for married filing jointly. These thresholds adjust annually for inflation. Check the current year's limits at IRS.gov (opens in new tab) before contributing. Above the applicable threshold, you cannot contribute directly. There is a workaround called a "backdoor Roth IRA" that involves contributing to a non-deductible traditional IRA and then converting it. Whether that makes sense in your situation depends on factors your tax professional can evaluate.

One feature that distinguishes Roth IRAs from traditional IRAs and 401(k)s: there are no required minimum distributions during the account owner's lifetime. That gives you more flexibility in how and when you draw down the account in retirement. You can also withdraw your contributions (not earnings) at any time without penalty, since you already paid tax on them. The same annual contribution limits apply as for traditional IRAs, and the limit is shared across both account types.

A SEP IRA (opens in new tab) allows contributions of up to 25% of net self-employment income, up to an annual dollar cap (approximately $70,000 as of 2025), whichever is less. This cap adjusts annually for inflation. Verify the current limit at the IRS SEP page linked above. Contributions are pre-tax, and the tax treatment mirrors a traditional IRA: you deduct contributions now and pay income tax on withdrawals in retirement. RMDs begin at 73. There is no Roth version of a SEP IRA.

The SEP IRA is simpler to open and maintain than a solo 401(k), which is the main alternative for self-employed people. There are no annual filing requirements for a SEP as long as only the employer (you) is contributing. The catch: if you have employees, you must contribute the same percentage of their compensation as you contribute for yourself. This makes SEP IRAs less attractive once you start hiring, because employer contributions for all eligible employees are required.

If you are self-employed and looking for even higher limits or the ability to make both employee and employer contributions, a solo 401(k) may allow more total contributions in some situations. That is a comparison worth running with a tax professional against your specific income and business structure.

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 and the money keeps growing without an immediate tax bill. The key is doing a direct rollover: the money goes from the 401(k) plan directly to the IRA without passing through your hands. If the check is made out to you instead of the IRA custodian, the plan is required to withhold 20% for taxes, and you have 60 days to deposit the full amount (including that withheld 20% from 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 designed for businesses with 100 or fewer employees. It works similarly to a 401(k) but with lower administrative costs. Contribution limits are lower than a 401(k) but higher than a regular IRA, and early withdrawals within the first two years carry a 25% penalty rather than 10%. If you are an employee at a small business, this may be what your employer offers instead of a 401(k).

An inherited IRA applies when you inherit retirement account assets from someone who has died. The rules around inherited IRAs changed significantly with the SECURE Act in 2019 and the SECURE 2.0 Act in 2022. Most non-spouse beneficiaries must now deplete the account within 10 years, and specific RMD rules within that window depend on whether the original owner had started taking distributions. This is an area where the rules are complicated enough that a tax professional's input is worth the cost.

Narstar manages accounts held at Interactive Brokers. Those accounts can be: individual taxable brokerage accounts, joint accounts, Traditional IRAs, Rollover IRAs, Roth IRAs, SEP IRAs, trust accounts, and UGMA/UTMA custodial accounts for minors. All of those account types are available at IBKR, and all of them can hold individual stocks, which is what our three model portfolios consist of.

We do not manage active 401(k) accounts at an employer's plan. Your current 401(k) stays where it is. We cannot access it and we do not try to. RSU accounts at employer brokerages are also outside our scope. 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: the accounts you open at IBKR and fund yourself, whether that is a taxable account, a new IRA, or a rollover from an old 401(k) after you change jobs.

If you have a mix of account types and want to understand how the accounts we manage would fit alongside the ones we don't, the contact form below is the right starting point. We'll explain what makes sense for your situation 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.