Traditional retirement accounts — including traditional IRAs and traditional 401(k)s — accept pre-tax contributions that reduce taxable income today, with ordinary income tax owed on withdrawals in retirement. Roth accounts work the opposite way: contributions are made with after-tax dollars, but qualified withdrawals in retirement are entirely free of federal income tax.
This is general information, not tax advice — consult a qualified tax professional about your specific situation.
Traditional vs Roth: The Core Tax Distinction
The single most consequential choice in retirement savings is whether to pay taxes now or later. Both paths lead to the same destination — tax-advantaged retirement income — but the timing differs fundamentally.
Traditional accounts (traditional IRA, traditional 401(k), 403(b), and similar employer plans) operate on a deferred-tax basis. Eligible contributions may reduce adjusted gross income in the year they are made. The money then grows tax-deferred inside the account. When distributions begin in retirement, the IRS treats every dollar withdrawn as ordinary income, taxed at whatever marginal rate applies in that future year.
Roth accounts (Roth IRA, Roth 401(k)) flip the sequence. Contributions are not deductible — they come from income on which tax has already been paid. Inside the account, growth is tax-free. Qualified distributions — generally those taken after age 59½ from an account that has been open at least five years — are completely free of federal income tax.
A useful reference comparing these two paths in detail: 2026 federal tax brackets and marginal rates.
Side-by-Side Comparison
| Feature | Traditional IRA / 401(k) | Roth IRA / Roth 401(k) |
|---|---|---|
| Tax on contributions | Pre-tax (deductible, subject to limits) | After-tax (no deduction) |
| Tax on qualified withdrawals | Ordinary income tax owed | Tax-free |
| Income limits to contribute | None for 401(k); IRA deductibility phases out for workplace plan participants | Roth IRA has MAGI eligibility phaseouts; Roth 401(k) has no income limit |
| Required Minimum Distributions | Yes, beginning at age 73 (under current law) | Roth IRA: none during owner's lifetime; Roth 401(k): subject to RMDs (though rules have evolved — confirm at irs.gov) |
IRA Contribution Limits for 2026
The IRS adjusts IRA contribution limits annually for inflation. For 2026, eligible individuals may contribute up to $7,000 to all IRAs combined (traditional plus Roth). Individuals who are age 50 or older by the end of the tax year may contribute an additional $1,000 catch-up contribution, bringing the maximum to $8,000.
These limits are aggregate across all IRA accounts a person holds — not per account. Because COLA adjustments happen each fall, always confirm current-year figures at irs.gov/retirement-plans.
Contributions cannot exceed the taxpayer's taxable compensation for the year. Spousal IRA rules allow a working spouse to contribute on behalf of a non-working spouse, provided the couple files jointly and has sufficient combined earned income.
Traditional IRA Deductibility Phaseouts
Any taxpayer with earned income may contribute to a traditional IRA, but whether that contribution is tax-deductible depends on two factors: whether the individual (or their spouse) is covered by a workplace retirement plan, and their modified adjusted gross income (MAGI).
Not covered by a workplace plan: The contribution is fully deductible regardless of income.
Covered by a workplace plan for 2026 (approximate ranges — confirm at irs.gov):
- Single or head of household: deductibility phases out between $79,000 and $89,000 MAGI
- Married filing jointly (the covered spouse): phases out between $126,000 and $146,000 MAGI
- Married filing jointly (the non-covered spouse, but covered by their own employer plan): phases out between $236,000 and $246,000 MAGI
Above the upper threshold, traditional IRA contributions are nondeductible. Eligible taxpayers may still make nondeductible traditional IRA contributions (which create a "basis" tracked on IRS Form 8606) or may consider a Roth IRA if income permits.
The IRS details these rules in Publication 590-A, which covers IRA contributions, deductibility, and rollovers.
Roth IRA Income (MAGI) Eligibility Limits
Roth IRAs carry income eligibility limits. For 2026, the ability to contribute to a Roth IRA phases out based on MAGI:
- Single or head of household: phaseout range approximately $150,000 to $165,000 MAGI
- Married filing jointly: phaseout range approximately $236,000 to $246,000 MAGI
- Married filing separately (and lived with spouse at any point during year): phaseout $0 to $10,000
Taxpayers whose MAGI exceeds the upper limit are not eligible to contribute directly to a Roth IRA for that year. Some individuals in this situation use a "backdoor Roth" strategy involving a nondeductible traditional IRA contribution followed by a conversion — a process with its own tax considerations. Confirm current phaseout figures at irs.gov/retirement-plans since COLA limits change annually.
401(k) Contribution Limits for 2026
Employer-sponsored 401(k), 403(b), and most 457 plans allow much higher contribution limits than IRAs. For 2026, the IRS elective deferral limit is $23,500 per year.
Participants who are age 50 or older may make an additional catch-up contribution of $7,500, for a combined maximum of $31,000.
Under rules introduced by SECURE 2.0, participants aged 60, 61, 62, or 63 are eligible for a higher catch-up limit of $11,250 (instead of $7,500) for 2025 and after. Confirm the applicable catch-up amount for the current year at irs.gov/retirement-plans, as this is a newer provision and subject to further IRS guidance.
There is no income limit for contributing to a 401(k) plan through payroll deferral, whether traditional or Roth.
Employer Matching Contributions
Many employers match a portion of employee 401(k) contributions — a common structure is 50 cents or $1 for each dollar an employee contributes, up to a percentage of compensation. Employer matching contributions are generally made on a pre-tax basis and are subject to ordinary income tax when distributed, regardless of whether the employee's own contributions were traditional or Roth.
Employer contributions are subject to vesting schedules, which determine how long an employee must remain with the employer before fully owning the matched funds. The combined employer-plus-employee contribution to a defined contribution plan is subject to a separate annual limit (the Section 415 limit), which for 2026 is $70,000 (or 100% of compensation if lower). Confirm at irs.gov.
How Withdrawals Are Taxed
Traditional IRA and 401(k) Withdrawals
Every dollar withdrawn from a traditional IRA or traditional 401(k) is included in ordinary taxable income in the year received, unless a portion represents after-tax basis (from prior nondeductible contributions tracked on Form 8606). There is no special capital-gains rate — the full amount is taxed as ordinary income at the taxpayer's marginal bracket.
Roth IRA Qualified Distributions
A Roth IRA distribution is "qualified" — and therefore entirely tax-free — when both of the following conditions are met:
- The account has been open for at least five years (measured from the first tax year for which a contribution was made to any Roth IRA), and
- The distribution occurs after the account holder reaches age 59½, becomes disabled, dies (paid to a beneficiary), or is used for a first-time home purchase (up to a $10,000 lifetime limit).
Non-qualified Roth distributions follow ordering rules: contributions come out first (always tax- and penalty-free), then conversions, then earnings.
IRS Publication 590-B provides the authoritative rules on IRA distributions, including Roth ordering rules, qualified distribution requirements, and the five-year clock.
Required Minimum Distributions (RMDs)
The IRS does not allow tax-advantaged retirement funds to accumulate indefinitely. Required Minimum Distributions (RMDs) force account holders to begin withdrawing a minimum amount each year.
Under current law (as shaped by the SECURE Act and SECURE 2.0), the RMD beginning age is 73 for individuals who turn 72 after December 31, 2022. The first RMD may be deferred until April 1 of the year following the year the account holder turns 73, though taking two distributions in one year has income-tax implications.
Accounts subject to RMDs:
- Traditional IRAs
- Traditional 401(k) plans (though still-working employees at age 73 may defer RMDs from their current employer's plan until retirement, if the plan allows)
- Roth 401(k) plans — Roth 401(k) accounts were historically subject to RMDs, though SECURE 2.0 eliminated RMDs from designated Roth accounts in employer plans beginning in 2024. Confirm current rules at irs.gov.
Accounts exempt from RMDs during the owner's lifetime:
- Roth IRAs — Roth IRA owners are not required to take distributions during their lifetime, making Roth IRAs a common estate-planning tool.
RMD amounts are calculated each year by dividing the prior December 31 account balance by a life-expectancy factor from IRS Uniform Lifetime Tables (Publication 590-B Appendix B). Failure to take a required RMD results in an excise tax of 25% of the amount not withdrawn (reduced to 10% if corrected within a two-year window).
Taxpayers who do not need RMD income for living expenses sometimes explore Qualified Charitable Distributions (QCDs), which allow individuals age 70½ or older to transfer up to $105,000 (2026 approximate; confirm at irs.gov) directly from an IRA to a qualified charity, satisfying RMD requirements without including the amount in gross income.
The 10% Early-Withdrawal Additional Tax
Distributions taken before age 59½ from most retirement accounts are generally subject to both ordinary income tax and an additional 10% tax (commonly called the early-withdrawal penalty). The IRS discusses this in Topic No. 451.
Common Exceptions to the 10% Additional Tax
The tax code provides a number of exceptions. The following circumstances may allow a distribution before 59½ without the 10% additional tax (ordinary income tax may still apply):
- Death or disability of the account holder
- Substantially Equal Periodic Payments (SEPP / 72(t) distributions): A series of equal payments based on life expectancy, taken at least annually and continuing for the longer of five years or until age 59½
- Qualified birth or adoption: Up to $5,000 per account per event
- First-time home purchase: Up to $10,000 lifetime from IRAs only (not 401(k)s without a plan provision)
- Higher education expenses: From IRAs only
- Health insurance premiums while unemployed: From IRAs only
- Medical expenses exceeding the deductible threshold: From both IRAs and 401(k)s
- IRS levy on the plan
- Separation from service at age 55 or older (Rule of 55): For 401(k) and similar employer plans, when leaving employment at 55 or older — not available for IRAs
- Qualified Domestic Relations Order (QDRO): Distributions to an alternate payee pursuant to a divorce decree
Roth IRA contributions (not earnings) may always be withdrawn at any time without tax or penalty, because contributions were made with after-tax dollars. Only Roth earnings are subject to the 10% additional tax if withdrawn before the qualified-distribution rules are met.
For a related overview of how investment gains factor into tax planning, see capital gains tax rules. Pairing retirement accounts with tax-advantaged health savings can also optimize an overall strategy — see HSA tax benefits explained.
Rollovers and Conversions
Money can generally move between retirement accounts without immediate tax consequences when handled correctly. A direct rollover from a 401(k) to a traditional IRA, for example, is not a taxable event. Converting a traditional IRA (or traditional 401(k)) to a Roth IRA is a taxable event — the converted amount is included in gross income in the year of conversion, taxed as ordinary income, but no 10% additional tax applies to conversions.
The TaxPros Rated newsroom covers related topics including Roth conversion strategies and rollover mechanics.
Frequently Asked Questions
Q: Can an eligible taxpayer contribute to both an IRA and a 401(k) in the same year?
A: Yes. Contributions to an employer plan and to an IRA are tracked under separate limit systems. An eligible individual may contribute up to the 401(k) elective deferral limit through their employer plan and also make an IRA contribution (traditional or Roth, subject to income limits) in the same year. However, IRA deductibility may phase out if the taxpayer is covered by a workplace plan — general information, not tax advice; consult a qualified tax professional about your specific situation.
Q: What happens if a Roth IRA is opened but the taxpayer later discovers their income exceeded the contribution limit?
A: An excess Roth IRA contribution is subject to a 6% excise tax for each year it remains in the account. The IRS provides procedures for withdrawing the excess contribution (plus earnings) before the tax-filing deadline to avoid the excise tax, or for recharacterizing it. Consult a qualified tax professional about your specific situation.
Q: Are 401(k) loans subject to income tax?
A: 401(k) plan loans, if the plan allows them, are generally not treated as taxable distributions when the loan follows IRS rules (loan limits, repayment schedule). However, if the borrower defaults on the loan or leaves employment before repayment, the outstanding balance typically becomes a taxable distribution — and if the borrower is under 59½, the 10% additional tax may apply. This is general information, not tax advice; consult a qualified tax professional.
Q: Do Roth IRA beneficiaries pay income tax on inherited distributions?
A: Beneficiaries of an inherited Roth IRA generally do not pay federal income tax on distributions, provided the original owner met the five-year holding period. Under the SECURE Act, most non-spouse beneficiaries must fully distribute the account within 10 years. Estate and beneficiary rules are complex — consult a qualified tax professional about your specific situation.
Q: Is a Roth 401(k) always better than a traditional 401(k)?
A: The relative advantage depends on whether marginal tax rates are expected to be higher or lower in retirement compared to today. Younger workers early in their careers with currently low marginal rates often benefit more from Roth treatment; higher earners who expect lower rates in retirement may benefit more from traditional pre-tax contributions. Many financial planners suggest diversifying across both types. This is general information, not tax advice — consult a qualified tax professional about your specific situation.
Q: What is the difference between the IRA five-year rule for contributions and the five-year rule for conversions?
A: The IRS applies two distinct five-year clocks in the Roth context. The first clock — for qualified distributions of earnings — begins with the first tax year for which any Roth IRA contribution was made, and it applies once across all Roth IRAs. The second clock applies separately to each Roth conversion: the converted funds must remain in the account for five years before withdrawal to avoid the 10% additional tax (for taxpayers under 59½). These are general rules with nuances; consult a qualified tax professional and review Publication 590-B for authoritative details.
This is general information, not tax advice — consult a qualified tax professional about your specific situation.