A Guide to Understanding Your 401(k) vs. Roth IRAs

What is a 401(k)?

A 401(k) is a retirement savings account offered through your employer, and if you have access to one, it's worth taking advantage of. With a 401(k), part of your paycheck goes into the account before taxes are taken out. That means less of your income is taxed right now, which can make a difference in your take-home pay while you're still working.

However, you’ll pay taxes when you start withdrawing money in retirement. At that point, your 401(k) withdrawals are taxed as regular income. Even though you can’t avoid taxes, you can put them off until you reach a lower tax bracket when you reach retirement age.

How Much Can I Contribute to My 401(k)?

If you’re preparing for retirement, here’s what to know:

• Employees can contribute up to $24,500 per year in 2026.
• If you’re 50 or older, you can add a catch-up contribution of $8,000, for a total of $32,500.
• If you’re between ages 60 and 63, you can contribute an extra $11,250, for a total of $35,750 in your peak earning years.1

The Advantages

A 401(k) can offer several benefits, especially if you're still working and want to build your retirement savings:

• Employer matching: Some employers match a portion of your contributions. For example, an employer might contribute $1 for every $1 you put into your 401(k), up to 3% of your salary.2 Contributing enough to receive the full match can help you save more for retirement.
• Higher contribution limits: If you're still working in your 60s, a 401(k)'s higher contribution limits can give you more room to increase your retirement savings.

The Drawbacks

A 401(k) also has some limitations to consider:

• Required Minimum Distributions (RMDs): Once you turn 73, you're required to withdraw a minimum amount from your 401(k) each year.3 These withdrawals are usually taxed as ordinary income.
• Higher taxes and Medicare premiums: Large 401(k) withdrawals can increase your taxable income, potentially pushing you into a higher tax bracket or resulting in higher Medicare premiums.
• Early withdrawal penalties: Taking money out of a 401(k) before age 59½ can result in income taxes and a 10% additional tax.
• Investment risk: Many 401(k) plans offer investments with significant stock market exposure, so a downturn close to retirement can reduce the value of your savings when you may have less time to recover.

What Is a Roth IRA?

A Roth IRA is a retirement account you open yourself, rather than through an employer. Unlike a traditional 401(k), you contribute money you've already paid taxes on, so you don't receive an upfront tax deduction. You won’t get a tax break upfront, but your retirement account money grows tax-free, and qualified withdrawals in retirement are also tax-free. That makes an enormous difference when you’re on a fixed income and every dollar counts.

Compared to a 401(k), a Roth IRA has different contribution limits :

• You can contribute up to $7,500 per year in 2026
• If you’re 50 or older, you can contribute $8,600
• To contribute, your income must fall below $153,000 (single filers) or $242,000 (married filing jointly)

The Advantages

A Roth IRA also offers several benefits that can make it useful for retirement planning:

• No required minimum distributions: Roth IRAs don't require the original account owner to take required minimum distributions during their lifetime. This means you can keep your money invested longer, which can help you manage taxes more easily.
• Flexible access to contributions: You can withdraw your original contributions at any time without taxes or penalties, although different rules apply to earnings.

The Drawbacks

Roth IRAs also have some limitations to consider:

• No upfront tax deduction: Roth IRA contributions are made with after-tax dollars, so you don't receive a tax deduction when you contribute.
• Five-year rule: You need to have held a Roth IRA for at least five years before withdrawing earnings tax-free, even if you're over age 59½.
• Income limits: Higher earners may not qualify to contribute directly to a Roth IRA.
• Lower contribution limits: Roth IRAs have lower annual contribution limits than 401(k)s, so they may work best as a supplement to other retirement savings.
• Taxes on Roth conversions: Converting money from a traditional IRA or 401(k) to a Roth IRA generally makes the converted amount taxable in the year of the conversion.

401(k) vs. Roth IRA

Here’s a side-by-side quick-reference comparison of the two type of accounts:

Data from this chart comes from IRA contribution limits

Choosing Retirement Accounts on a Fixed Income

For seniors who rely mainly on Social Security, a pension, or retirement account withdrawals, taxes can have a significant impact on their monthly budget. A Roth IRA can provide some flexibility because qualified withdrawals are tax-free.

How RMDs Can Affect Your Taxes

Required minimum distributions (RMDs) from traditional IRAs and 401(k)s can increase your taxable income. Those with higher incomes can run into Income-Related Monthly Adjustment Amount (IRMAA), which are additional Medicare Part B and D premiums charged to higher-income beneficiaries.

In 2026, single filers above $109,000 in modified adjusted gross income may pay IRMAA surcharges on Medicare premiums.

Why Roth IRAs Can Help

Roth IRA withdrawals ‌aren't included in the income used to determine whether you owe IRMAA surcharges. They also don't count toward the calculation used to determine whether your Social Security benefits are taxable. This can make Roth savings useful for managing taxable income in retirement.

When Should I Consider a Roth Conversion?

If you have several years before you're required to take RMDs, a Roth conversion may be worth considering. This involves moving money from a traditional IRA or eligible retirement account into a Roth IRA and paying income taxes on the converted amount. Converting smaller amounts over several years may help manage the tax impact, but the strategy isn't right for everyone.

Consider speaking with a qualified tax or financial professional before making a Roth conversion, especially if the conversion could affect your tax bracket, Medicare premiums, or other retirement benefits.

For Adult Children Managing a Parent’s Finances

Many adult children step in to help a parent manage their finances, especially after a spouse passes away, or when a parent’s health makes financial management more difficult.

If you’re in a similar situation, here’s what you’ll need to check:

1.   Get a complete picture. Find all of your parent’s retirement accounts, especially since older adults may forget about 401(k)s from previous employers.
2.   Verify RMDs are being taken correctly. If your parent misses a required minimum distribution (RMD), they’ll have to pay a 25% penalty on the missed amount. RMDs are not automatic, so someone must withdraw the required amount each year.
3.   Review beneficiaries. Outdated beneficiaries, like a deceased spouse or former partner, override a will. Update listed beneficiaries every few years to avoid difficulties carrying out your parent’s estate plan.
4.   Understand the tax bracket. Knowing your parent’s current income bracket helps determine whether a Roth conversion makes sense or whether it would create an unnecessary tax burden.
5.   Consult the right professionals. For account questions, call the custodian directly. For tax strategy, consult a CPA or financial advisor. For estate matters, get in touch with an elder law attorney.

What Is a Gold IRA?

If you’re concerned about inflation or stock market volatility, you may want to consider a gold IRA. A gold IRA is a self-directed IRA that holds physical precious metals, like gold coins or bars, instead of traditional stocks and bonds. Because it’s still an IRA, the same tax rules apply. The major difference is that your assets are physical.

Two companies that specialize in helping retirees set up precious metals IRAs are Goldco and Augusta Precious Metals.

Goldco

Goldco specializes in helping clients roll over existing retirement accounts, such as 401(k)s and traditional IRAs, into precious metals IRAs. The company works with third-party custodians to administer accounts and facilitate the rollover process.

The company requires a minimum investment of around $25,000. Its services may be ideal for seniors who have retirement savings in an old 401(k) and want to explore whether a precious metals IRA fits their retirement strategy.

Augusta Precious Metals

Augusta Precious Metals takes an education-focused approach to precious metals investing. The company provides educational resources and assigns customers a personal education specialist to explain the process, including how gold IRAs work and which fees may apply.

Augusta customers must make a minimum investment of $50,000. Its higher minimum may make it less accessible to seniors with smaller retirement balances. However, Augusta Precious Metals may appeal to those who want more one-on-one guidance before deciding whether to invest in precious metals.

It’s important to remember that a gold IRA isn’t a replacement for a traditional 401(k) or Roth IRA. Precious metals IRAs can have higher fees and additional requirements compared to traditional retirement accounts, including costs for purchasing and storing physical metals. For some seniors, a gold IRA may be worth considering as one part of a diversified retirement strategy rather than as a primary retirement account.

Conclusion

Understanding the difference between a 401(k) and a Roth IRA can help you make more informed decisions about your retirement savings. You don't need to be a financial expert to get started. For seniors on a fixed income, a Roth IRA's tax-free qualified withdrawals and lack of RMDs can provide valuable flexibility. If you're still working and want to increase your retirement savings, a 401(k)'s higher contribution limits may offer more room to save. The best choice depends on your income, retirement goals, and overall financial situation.