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Lesson 7.4 · 4 of 5 · Tax, pensions and protection where you live

401(k) and IRA explained: retirement savings and tax breaks in the US

US retirement savings rest on three layers: Social Security, a workplace plan such as the 401(k), and your own IRA. In 2026 you can put up to $24,500 into a 401(k) and $7,500 into IRAs. Traditional accounts cut your tax now; Roth accounts make withdrawals tax-free later.

6 minBeginnerUpdated October 29, 2026
0 of 5 exercises

Terms in this lesson

Compound interest
You earn on your past earnings too, not just on the amount you started with.
Index fund
A fund that buys every company in an index, in the same proportions.
Asset allocation
How much of your money goes into stocks, how much into bonds and how much stays in cash.

Opening question

What is the main difference between a traditional 401(k) and a Roth 401(k)?

It does not matter if you get it wrong: trying first helps you remember.

Social Security and the 401(k): your pension at work

Definition

What is Social Security?

The compulsory public pension, paid for out of your wages.

You pay 6.2% of your wages and your employer pays the same, up to $184,500 of wages in 2026. From 1 January 2027 that cap rises to $192,300, as already announced. If you were born in 1960 or later, your full retirement age is 67; you can start from 62, with a permanently smaller benefit.

Definition

What is a 401(k)?

A retirement account run by your employer, filled straight from your paycheck.

You choose a percentage of your salary and the money goes in before you see it, usually into funds picked from the plan’s menu. Many employers add a match. Government and non-profit workers have similar plans: the 403(b), the 457 and the Thrift Savings Plan, with the same limit.

$24,500your yearly limit, 2026
·
$72,000you and your employer together

From 50 you can add $8,000, or $11,250 at ages 60 to 63. From 2026, if your wages from that employer were above $150,000 the year before, these extra contributions must go in as Roth.

Work it out

Your salary is $60,000. You put 6% into your 401(k). Your employer matches 50% of what you put in, on up to 6% of your salary. How many dollars a year does your employer add?

$
A hint

First your contribution, then half of it.

Traditional or Roth: tax relief now or later

Traditional 401(k) or IRAtax relief now

  • contributions lower this year’s taxable income
  • growth is not taxed while it stays in
  • withdrawals are taxed as ordinary income
  • required minimum distributions from age 73

Roth 401(k) or Roth IRAtax relief later

  • qualified withdrawals are tax-free
  • no required withdrawals during your lifetime
  • no deduction now: you put in money already taxed
  • a Roth IRA has income limits

Can you deduct a traditional IRA? If neither you nor your spouse has a workplace plan, yes. If you do, the deduction shrinks once your modified AGI passes $81,000 and disappears at $91,000 (single, 2026). You can still put the money in; it just goes in without the deduction.

Check yourself

You can save $1,000 of salary. Traditional: the full $1,000 goes in, and withdrawals are taxed at 22%. Roth: you pay 22% first, so $780 goes in. Both triple by retirement. Which leaves you with more?

Early withdrawals, RMDs and the Saver’s Credit

  1. Before 59½taking money out of a 401(k) or IRA usually costs income tax plus a 10% additional tax, with some exceptions.
  2. From 73you must withdraw a minimum each year from traditional accounts (required minimum distributions). For people born in 1960 or later the age becomes 75. A workplace plan may let you wait until you retire if you still work there.
  3. Roth accountsRoth IRAs and Roth 401(k)s have no required withdrawals while the owner is alive.

Work it out

2026. You are 40 and take $10,000 out of a traditional IRA. You are in the 22% bracket, no exception applies, and the additional tax on early withdrawals is 10%. How much federal tax does it cost?

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Myth or fact?

“Once I reach 73, I must start taking money out of my Roth IRA every year.”

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What would you do?

You are changing jobs and have $18,000 in your old employer’s 401(k). What do you do with it?

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What you learned

  • Social Security takes 6.2% of your wages, and a 401(k) takes up to $24,500 in 2026, often with an employer match.
  • Traditional accounts cut your tax now and tax withdrawals; Roth accounts tax you now and make qualified withdrawals tax-free.
  • Withdrawals before 59½ usually cost an extra 10%, and traditional accounts require withdrawals from 73.

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Next lesson · 6 minUS SIPC and FDIC

Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: IRS IR-2025-111 and Notice 2025-67 (2026 limits), IRS Topic 557, IRS required minimum distributions FAQs and final regulations (Federal Register, 19 July 2024), IRS Saver’s Credit page, IRS IR-2026-89 (Saver’s Match), SSA contribution and benefit base and early retirement pages; checked on 29 October 2026.