Financial Education Center
Financial Education Series
Retirement Account Contribution Limits
Understanding Your Options for Long-Term Financial Security
Navigating retirement accounts can be complex, but understanding contribution limits and account differences is essential for maximizing your long-term financial security. This guide explains current limits and important distinctions between various retirement accounts, particularly Roth IRAs vs. traditional 401(k) plans.
Why This Matters
The choices you make about retirement accounts today can significantly impact your financial future. Account ownership, contribution limits, tax advantages, and investment options all play crucial roles in determining how much money you'll have available in retirement and how much flexibility you'll have in accessing those funds.
2024-2025 Contribution Limits
Roth IRA
2024 Contribution Limits
2025 Contribution Limits
2024 Income Limits (Single Filers)
2024 Income Limits (Married Filing Jointly)
2025 Income Limits (Single Filers)
2025 Income Limits (Married Filing Jointly)
401(k) Plans
2024 Contribution Limits
2025 Contribution Limits
Income Limits
Employer Match
Required Minimum Distributions (RMDs)
Roth Accounts vs. Traditional 401(k): Key Differences
Account Ownership
Roth IRA: You own and control the account directly. It stays with you regardless of employment changes.
401(k): Employer-sponsored and managed. Your account is tied to your employment with limited control and portability.
Tax Treatment
Roth IRA: Funded with after-tax dollars. Qualified withdrawals in retirement are completely tax-free, including earnings.
401(k): Funded with pre-tax dollars, reducing your current taxable income. All withdrawals in retirement are taxed as ordinary income.
Investment Options
Roth IRA: Wide range of investment options including individual stocks, bonds, ETFs, and low-cost index funds from any provider.
401(k): Limited investment menu typically featuring mutual funds selected by your employer or plan administrator.
The Power of Account Ownership: Why Roth IRAs Stand Out
Complete Control Over Your Investments
With a Roth IRA, you can choose from virtually any investment option on the market. This means access to low-cost index funds across all market segments—from S&P 500 to small-cap and international markets—providing proper diversification often unavailable in employer 401(k) plans.
You're not limited to the handful of funds your employer selected, which may have higher expense ratios or inadequate performance. You can seek out the most cost-effective funds with the lowest expense ratios.
Flexibility in Accessing Your Money
Roth IRA contributions (not earnings) can be withdrawn at any time without penalties or taxes. This provides an emergency backstop that 401(k) plans simply don't offer unless you qualify for a hardship withdrawal.
A 401(k) loan must be repaid immediately if you leave your job, potentially forcing you to take a 10% penalty plus pay income tax if you can't repay the full amount. This creates significant financial risk during job transitions.
No Required Minimum Distributions
Roth IRAs have no required minimum distributions (RMDs) during your lifetime, giving you complete control over when and how much to withdraw. Traditional 401(k)s force withdrawals starting at age 73 whether you need the money or not, potentially pushing you into higher tax brackets.
Superior Legacy Planning
Roth IRAs offer significant inheritance advantages. When passed to heirs, they typically maintain their tax-free status. With a 401(k), your heirs will owe income taxes on every dollar they withdraw from their inheritance, potentially reducing its value significantly.
The Math Behind Roth vs. Traditional Accounts
From a purely mathematical perspective, if your tax rate remains exactly the same in retirement as during your working years, the end result of a Roth vs. traditional account would be identical. However, several factors typically make Roth accounts more advantageous:
The Tax Bracket Consideration
Many people will be in a lower tax bracket in retirement, which conventionally suggests traditional accounts would be better. However, this fails to account for potential future tax rate increases and the impact of required minimum distributions from traditional accounts pushing you into higher brackets.
With a Roth, your entire withdrawal is tax-free, regardless of how tax rates change in the future. This provides immunity from potential tax increases that may occur between now and your retirement.
Tax-Free Growth Advantage
With a traditional 401(k), your tax savings occur upfront but at your marginal tax rate. However, when you withdraw, you'll pay taxes on both contributions and decades of growth. With a Roth, you pay taxes only on the initial contribution, while all growth becomes completely tax-free.
For example, a $6,000 contribution that grows to $60,000 over 30 years:
- Traditional: Pay taxes on the full $60,000 when withdrawn
- Roth: Pay taxes only on the initial $6,000 contribution, with the $54,000 in growth completely tax-free
Optimal Retirement Saving Strategy
The ideal approach for most people is to utilize both types of accounts. First, contribute enough to your employer's 401(k) to capture the full company match—this is essentially free money. Then, fund a Roth IRA up to the annual contribution limit for tax-free growth and greater flexibility. If you still have funds to invest after maxing out your Roth IRA, return to your 401(k) and contribute additional amounts toward the annual limit.
Remember: Everyone's financial situation is unique. While this guide provides general information, consider consulting with a financial advisor to develop a retirement strategy aligned with your specific circumstances and goals.