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What’s the Best Way to Save for Retirement? Comparing Account Types

Why It Matters

• Comparing accounts does not mean there needs to be a one best answer.

• I setup all my clients with a variety of account types for their saving and investment goals.

• The below client receives social security, pension income, and has to take RMDs so there’s 3 income sources taxed as ordinary income.

• Having funds in a variety of account types provides tax diversification,

• They can realize some capital gains and dividends tax free or withdraw from their tax-free accounts to help them manage their taxes paid in retirement with careful planning.

• Retirement accounts can help you maximize tax advantages, create savings discipline, and set yourself up for financial security in the future.

• I’m breaking down the primary retirement account types so you can make informed decisions about where to save.

Employer-Sponsored Plans: A Match And So Much More

A 401(k) (for private-sector employees) and a 403(b) (for nonprofit and public-sector employees) allow you to contribute pre-tax dollars, reducing your taxable income.

• 2025 Contribution Limit: $23,500 (plus an extra $7,500 for those 50+)

• Tax Benefit: Contributions reduce taxable income; withdrawals in retirement are taxed

• Best For: Employees with access to an employer-sponsored plan, especially if there’s a match

🔹 Roth 401(k) Option: Many employers offer a Roth version, where contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.

• For high-income earners who exceed Roth IRA income limits and want to supercharge tax-free savings, there’s the Mega Back Door Roth.

• How It Works:

  1️⃣ Max out regular 401(k) contributions – In 2025, that’s $23,500 (or $30,500 if 50+).
  2️⃣ Make additional after-tax contributions – Up to the total 401(k) limit of $70,000 (or $77,500 if 50+).
  3️⃣ Convert after-tax contributions into a Roth IRA** (or Roth 401(k)), allowing the money to grow tax-free.

Traditional IRA: Tax-Deferred Growth

A Traditional IRA (Individual Retirement Account) is a great option if you don’t have access to a 401(k) or want to save more beyond your employer plan.

Sometimes contributions can be deductible on your taxes if you meet income limits. More about this here from the IRS.

Sometimes contributions are still made when investors want their interest, dividends, and capital gains to not be taxed until later in life.

• 2025 Contribution Limit: $7,000 ($8,000 if 50+)

• Tax Benefit: Contributions may be tax-deductible; withdrawals are taxed in retirement

• Best For: Those who want tax-deferred growth and potential deductions

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Roth IRA: Tax-Free Retirement Income

A Roth IRA flips the tax advantage—contributions are made with after-tax dollars, but qualified withdrawals (after age 59½) are 100% tax-free.

• 2025 Contribution Limit: $7,000 ($8,000 if 50+)

• Tax Benefit: No tax break now, but tax-free withdrawals later

• Income Limits: Single filers must earn under $161,000 (partial contributions up to $176,000); married couples under $240,000 (if you earn too much for this account, look at your employer sponsored plan Roth option mentioned earlier). There are also options for contributions to IRAs that can be converted to Roth IRAs called Backdoor Roth contributions. Another way to get money to Roth accounts for high earners.

• Best For: Those who expect to be in a higher tax bracket later or want tax-free retirement income

Self-Employed & Small Business Plans

If you're self-employed or own a small business, there are specialized retirement plans that allow for even higher contributions:

🔹 Solo 401(k): A powerful plan for business owners with no employees, allowing contributions as both employer and employee (up to $70,000 in 2025).
🔹 SEP IRA: Allows employers (or self-employed individuals) to contribute up to 25% of compensation, with a $70,000 cap.
🔹 SIMPLE IRA: A lower-cost alternative for small businesses with contribution limits of $16,500 in 2025.

Health Savings Account (HSA): An Opportunity For High Earners With Cash Reserves

While not a traditional retirement account, an HSA offers triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. The savings account was intended to cover out of pocket medical expenses today but if you can use your cash savings for those instead and allow this account to grow over time, it can be a powerful source of tax free funds in retirement.

After age 65, you can use the funds for any expense (though non-medical withdrawals are taxed like a Traditional IRA).

• 2025 Contribution Limit: $4,300 for individuals, $8,550 for families (+$1,000 if 55+)

• Tax Benefit: Contributions reduce taxable income, and withdrawals for healthcare are tax-free

• Best For: Those with a high-deductible health plan who want an extra retirement savings vehicle

Which Retirement Account Should You Prioritize?

This article provides more detail but if there was an ideal order of retirement account contributions I feel like this would be it. This already assumes you have a healthy emergency savings cash reserve to be clear. That is a bigger priority if you are significantly short there.

Employer Plan Match, HSA, Max 401k contribution, Roth IRA, Taxable brokerage account.