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

A 401(k) is the retirement account most people get through work. Money comes out of your paycheck before you're paid, goes into the plan, and your employer picks which funds you're allowed to invest in. It's worth understanding the rules before you count on it for retirement.

A traditional 401(k) (opens in new tab) takes money out of your paycheck before taxes, invests it, and taxes you later when you take it out in retirement. A Roth 401(k) works the other way: you put in money you've already paid tax on, and withdrawals in retirement are tax-free as long as you follow the rules.

Many employers match part of what you put in, up to a certain percent of your pay. That match is extra money from your employer, on top of your salary. Contribute less than the amount they'll match, and you're giving up money your employer would otherwise have added to your account.

You can put in a lot more than an IRA allows. For 2026, the employee limit is $24,500 a year if you're under 50, and $32,500 if you're 50 or older (that extra $8,000 is called a "catch-up" contribution). If you're between 60 and 63, the catch-up is even bigger: $11,250. These numbers go up most years, so check IRS.gov (opens in new tab) for the current limit before you decide how much to contribute.

The downside: you can only invest in whatever funds your employer's plan offers, usually a set list of mutual funds and target-date funds. You can't buy individual stocks. Take money out before age 59 and a half, and you'll usually owe a 10% penalty on top of regular income tax. Later in life, the IRS makes you start taking money out of a traditional 401(k) whether you need it or not. These forced withdrawals are called required minimum distributions, or RMDs. For most people the starting age is 73, though it's 75 if you turn 73 after 2032 (73 applies if you turn 72 after 2022 and 73 before 2033). Check the current rule at IRS.gov (opens in new tab).

When you leave a job, you've got four choices for the old 401(k): leave it there, move it to your new employer's plan, move it into an IRA, or cash it out. The first three all avoid taxes for now, and which is best depends on the plan's fees, its investment choices, and how well the money is protected from creditors if you're ever sued. Cashing out means paying income tax plus the 10% penalty right away. It's almost always the worst option, and it's the one people end up regretting.

A traditional IRA works like a traditional 401(k): you may be able to deduct what you put in now, and you pay income tax when you take the money out in retirement. The word "may" matters here. Whether you get the deduction depends on your income and whether you or your spouse also have a retirement plan at work. Above certain income levels, the deduction shrinks and then disappears, even though the account works the same way either way. A tax professional can tell you exactly where your income lands.

For 2026, the annual contribution limit is $7,500 if you're under 50, or $8,600 if you're 50 or older. That limit covers all your IRAs added together, traditional and Roth combined, not $7,500 for each one separately. The number changes some years, so check IRS Publication 590-A (opens in new tab) before you contribute.

This is where an IRA beats a 401(k): you can invest in almost anything the brokerage offers, individual stocks, ETFs, bonds, mutual funds, instead of being stuck with whatever short list your employer picked. Take money out before 59 and a half and you'll usually pay the same 10% penalty as a 401(k), with a few exceptions. Required withdrawals start at 73 or 75, depending on when you were born.

One more thing worth saying plainly: none of this protects you from losing money. The account type only changes how you're taxed. It doesn't change whether your investments can go down in value.

A Roth IRA (opens in new tab) is funded with money you've already paid tax on, so there's no tax deduction when you contribute. The payoff comes later: qualified withdrawals in retirement, including all the growth, come out completely tax-free. Over many years that can add up. But "tax-free growth" describes how the account is taxed, not a promise about how the investments will do. Money in a Roth IRA can still lose value. The tax treatment doesn't make the investments any safer.

Roth IRAs have an income limit that traditional IRAs don't. In 2026, you start losing the ability to contribute once your income, a number called modified adjusted gross income, passes $153,000 for single filers or $242,000 for married couples filing jointly. Those numbers move most years, so check IRS.gov (opens in new tab) for the current ones. Earn too much and you can't contribute directly, but there's a common workaround called a "backdoor Roth": put money into a traditional IRA first, without taking the tax deduction, then convert it to a Roth. Whether that's worth doing depends on your situation, so talk to a tax professional before trying it.

Roth IRAs never force you to take money out during your lifetime. You decide when, or if, to use it. You can also pull out the money you contributed, not what it's earned, at any time with no penalty, since you already paid tax on it. The yearly contribution limit is the same as a traditional IRA, and it's shared between the two, not doubled.

A SEP IRA (opens in new tab) lets an employer put in up to 25% of an employee's pay, capped at $72,000 for 2026, whichever number is smaller. If you're self-employed, that 25% isn't applied to your raw self-employment income. It's applied after you subtract half your self-employment tax and the contribution itself, which works out to roughly 20% of your income in practice, not 25%. The IRS worksheets in Publication 560 (opens in new tab) walk through the actual math. The cap goes up most years. A traditional SEP contribution is pre-tax: you deduct it now and pay income tax when you withdraw in retirement. Required withdrawals kick in at 73 or 75, depending on your birth year. Roth SEP contributions exist under a newer law, the SECURE 2.0 Act, but not every provider offers them, so ask your custodian before assuming you can do one.

A SEP IRA is easier to set up and run than a solo 401(k). There's no annual filing paperwork as long as you're the only one contributing. The catch: once you have employees, you have to contribute that same percentage of their pay too, not just your own. Hire a few people and that adds up fast.

A solo 401(k) can sometimes let you contribute more overall, because it lets you put money in both as the "employee" and as the "employer." A tax professional can run the actual numbers against your income and business setup. This math gets complicated fast, so don't try to work it out on your own.

A rollover IRA is a traditional IRA you fund by moving money out of an old employer's 401(k) or similar plan. You don't owe tax on the move itself. Ask for a direct rollover: the money goes straight from the 401(k) to the IRA without ever touching your hands. If the check gets made out to you personally instead of the IRA custodian, the plan is required to withhold 20% for taxes, and you then have 60 days to deposit the full original amount, including that missing 20% out of your own pocket, or the IRS treats it as a taxable withdrawal. A direct rollover skips that risk entirely. For the full walkthrough, see how to roll over a 401(k) to an IRA.

A SIMPLE IRA, short for Savings Incentive Match Plan for Employees, is a plan small businesses (100 employees or fewer) offer instead of a 401(k). It's cheaper for the employer to run. You can put in more than a regular IRA allows but less than a 401(k): $17,000 for 2026. Pull money out in the first two years and the penalty is 25% instead of the usual 10%. If your employer offers one of these instead of a 401(k), that's a perfectly normal setup, not a red flag.

An inherited IRA is what you get when you inherit retirement money from someone who died. The rules changed a lot under two laws, the SECURE Act in 2019 and SECURE 2.0 in 2022. Most people who inherit an IRA from someone other than a spouse now have to empty the account within 10 years, and the exact withdrawal rules inside that window depend on whether the original owner had already started taking money out.

Get a tax professional involved if this applies to you. These rules are detailed, and getting them wrong is expensive.

One thing this table can't show: none of these accounts protect you from losing money. They only change when you pay tax, not whether your investments can go down.

Narstar manages accounts held at Interactive Brokers: regular taxable accounts, joint accounts, Traditional IRAs, Rollover IRAs, Roth IRAs, SEP IRAs, trust accounts, and business accounts. Every one of these can hold individual stocks, which is what our three model portfolios, including Income and Growth, are built from.

Every IRA we manage is billed the same way: a uniform 1.00% a year, calculated on the average daily net liquidation value and billed quarterly in arrears, regardless of model portfolio mix. One retirement account can hold more than one model portfolio at once, so a Traditional, Roth, Rollover, SEP, or SIMPLE IRA can hold Income, Growth, and Speculative together in a single account at that one rate. A non-retirement account holds one model portfolio each. Whether the uniform rate works out higher or lower than our taxable rates depends entirely on which models the account holds, so it is worth checking against your own mix. Interactive Brokers charges separate brokerage commissions and fees, which go to them, not to us.

We don't manage a 401(k) you still have open at your current job. It stays right where it is; we have no way to reach it and don't try to. Same goes for RSU accounts at your employer's brokerage. If you have unvested stock grants or an active 401(k) where you work now, those stay inside your employer's system.

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

Haven't picked an adviser yet? The guide to finding a fee-only adviser covers what to look for and how to check someone's registration. If you've got several kinds of accounts and want help seeing how they fit together, use the contact form below. We'll walk through it with you, no pressure to sign up. The homepage shows what our 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. They have separate limits: up to $24,500 in the 401(k) and up to $7,500 across your IRAs in 2026, before catch-up amounts. One catch: if you're already covered by a plan at work, the traditional IRA tax deduction shrinks and disappears above certain income levels. You can still put the money in, you just might not get the deduction. A tax professional can tell you exactly where your income falls.

Roth or traditional: which is better?

Honestly, it depends, and anyone who answers confidently without knowing your finances is guessing. It comes down to whether your tax rate is higher right now or likely to be higher once you retire. Traditional wins if it's higher now. Roth wins if it's higher later. That depends on your income, where you live, and what tax rules look like years from now, which nobody can fully predict. Bring your actual numbers to a tax professional.

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

You've got four choices: leave it where it is, move it to your new employer's plan, roll it into an IRA, or cash it out. Cashing out is almost always the most expensive option, and people still pick it anyway. The rollover guide walks through the whole process, including the tax traps to avoid.

Can I take money out before 59.5 without a penalty?

Usually you'll owe a 10% penalty on top of income tax, but there are exceptions. Money you contributed to a Roth IRA, not what it earned, can come out anytime, tax- and penalty-free. The "rule of 55" lets you take penalty-free 401(k) withdrawals if you leave that job at 55 or older. A few other exceptions cover things like certain medical bills or a first home purchase from an IRA. Check with a tax professional before pulling money out early. These rules are detailed, and getting them wrong is expensive.