Retirement contributions are the largest tax-advantaged lever available to most households. Traditional contributions reduce current-year taxable income; Roth contributions grow tax-free forever. Choosing between them is a bet on the marginal tax rate now versus the marginal tax rate in retirement.
- 01State the current contribution limits for 401(k), IRA, and Roth IRA.
- 02Distinguish traditional from Roth on tax treatment.
- 03Choose defensibly between traditional and Roth for a specific household.
The limits
401(k) elective deferral limits and IRA contribution limits are set annually and indexed. Catch-up contributions apply from age 50. Roth IRA contributions phase out above certain incomes. The employer match, if any, is on top of the elective limit.
The choice
A traditional contribution saves tax at the current marginal rate and is taxed at the future marginal rate on withdrawal. A Roth contribution pays tax now and is never taxed again. If you expect a higher marginal rate in retirement, Roth wins. If you expect a lower one, traditional wins. Most young high-savers should skew Roth; most peak earners should skew traditional.
The order
Capture the employer match first — it is free money. Then decide traditional versus Roth by tax bracket. Consider an HSA if eligible; it is the most tax-advantaged account in the code. Then IRA. Then remaining 401(k) capacity. Then taxable brokerage.
- Employer match first, always.
- Roth versus traditional is a marginal-rate bet.
- HSA before IRA if you qualify.