How to Choose the Right Retirement Account to Reach (and Even Exceed) Your Goals

According to a 2022 Charles Schwab survey, the average American thinks they need roughly $1.7 million to retire comfortably. And yet, based on a recent Vanguard study, the median retirement account balance is just $35,345.

The good news is, a comfortable retirement is very achievable if you understand the tools at your disposal. The tax advantages of 401(k)s and IRAs can help you not just reach your savings goals, but even exceed them.

Person studying financial documents and charts for investment research.

Image source: Getty Images.

You could earn “free” money with a 401(k)

The 401(k) is an employer-sponsored retirement account that allows participants to invest their pre-tax income. While you avoid taxes on the front end, you’ll pay income tax when you withdraw the funds.

The advantage is that you’ll most likely have less income in retirement than in your working years, which will put you in a lower tax bracket when you eventually pay Uncle Sam.

While the tax advantage is what most people focus on, the true advantage of a 401(k) lies in the employer match. As of the 2020 plan year, 86% of U.S. companies matched their employees’ 401(k) contributions up to a certain percentage of their salary, according to a survey from the Plan Sponsor Council of America..

For example, if you have an annual salary of $80,000 and your employer offers a 4% match, you could double your contributions up to $3,200 per year. If you contribute less than the match percentage, you’re essentially passing up free money.

According to a 2021 Vanguard study, 34% of 401(k) participants contribute less than their employer match, which equates to an estimated $24 billion in annual lost wealth.

There are some drawbacks to 401(k)s, including limited investment options, early withdrawal penalties, and required minimum distributions. That being said, if your employer offers a match, 401(k)s are a no-brainer.

Roth IRAs let you grow your money tax-free

Unlike 401(k)s, which are only accessible through an employer, individual retirement accounts (IRAs) are available to anyone who has earned income.

IRAs come in two main forms: traditional IRAs and Roth IRAs. A traditional IRA is similar to a 401(k) in that the tax advantage is upfront in the form of tax deductions.

With the Roth IRA, however, you contribute after-tax income. From there, though, your money grows 100% tax-free. In other words, whatever income you make from your investments is completely exempt from taxes.

So, which type of IRA is right for you?

The main advantage of a traditional IRA over a 401(k) is access to a wider range of investment options such as stocks and even cryptocurrencies. Most 401(k)s limit participants to mutual funds.

Roth IRAs, on the other hand, have the unique advantage of letting you grow your money tax-free.

Consider, for example, you invested $10,000 in the S&P 500 via a Roth IRA in 1990. You’d now have over $100,000 and owe nothing in capital gains taxes.

^SPX Chart

^SPX data by YCharts

Because of this incredible benefit, the IRS sets a rather stingy annual contribution limit on Roth IRAs.

The table below compares the 2023 contribution limits across all three retirement accounts.



Traditional IRAs

Roth IRAs

Under 50




Over 50




Data source: IRS.

It should also be noted that you could be ineligible to contribute to Roth IRAs depending on how much you earn. For a complete breakdown of IRA limitations, see this article.

Understand your options and get started early

Retirement accounts can be puzzling at first, but once you understand the pros and cons, they become fairly simple.


Roth IRA

Traditional IRA




Employer match

Tax-free growth with wide range of investment options

Wide range of investment options

High contribution limit

Access to contributed amounts without penalty

Tax-deferred growth




Limited access to funds while working

Low contribution limit

Low contribution limit

Limited investment options in most cases

Wage-based eligibility

Wage-based eligibility

If your employer provides a 401(k) match, you should contribute at minimum the percentage of your salary it will match. If you have leftover income for retirement savings after that, you should take advantage of the incredible tax benefits of a Roth IRA.

From there, you can choose to allocate more to your 401(k), or even a traditional IRA if you’re looking for more robust investment options.

Whichever route you decide, remember the key to a successful retirement is to start saving as early as possible and let compound growth do the work.