401k, Traditional IRA and Roth IRA Savings Not The Same (2024)

Almost every week, I read an article telling me how big of a nest egg I need to retire comfortably, and almost every time, I think about my own retirement funds and try to compare it to the guidelines. Yet, every single time, I ask myself:

Is the retirement savings being referred to a post or pretax amount?

It seems like minor detail, which makes the point all the more important. Pretax retirement savings does not equal post tax funds. Make sure you take this into account when you do your retirement planning, or risk a true awakening when you can least afford it.

What I’m saying sounds obvious now, but many people seem to forget that taxes will eat up a good portion of the 401k. Just because you have $30,000 in the plan doesn’t equate to the same amount in your online savings account.

How You Should Look at Your Retirement

When I do a quick tally of my retirement savings, I discount 40% of any account that will still be taxed. For example, any retirement accounts like the SEP IRA, Traditional IRA, and 401k is worth less than the number you see on your statement. Others, like the Roth IRA or your taxable investment account, is worth the full amount. This sounds trivial, but let’s use a hypothetical example to drive home this important point. Let’s say that Joe has the following saved up:

1. Traditional IRA (rolled over from previous work)- $60,000
2. 401k – $22,000
3. Roth IRA – $8,000
4. Savings – $8,000

Total = $98,000

Having close to $100,000 for retirement already saved up is a substantial amount, but is it really that much? If we discount the taxes that he will incur come retirement, the numbers become (I just take a simple 30% off as a quick, dirty and conservative way of doing this):

1. Traditional IRA – $48,000
2. 401k – $17,600
3. Roth IRA – $8,000
4. Savings – $8,000

Total = $81,600

$81,600 is not too shabby, but it’s not quite $100,000.

Okay, You Have My Attention, Now What

Even though the point I’m making is fairly obvious, many of us don’t think about the true value of our nest egg when we just glance at our 401k and IRA statements every quarter. If you are actively planning for your retirement, I strongly suggest doing a similar calculation and see if you are still on track.If anything, you will be more conservative and have more money to spend in retirement – hardly a bad situation.

Here Are Two More Retirement Savings Options You Might Not Have Considered

And now that you are thinking about the difference of pre-tax and post-tax retirement savings, let’s take a look at another two options you hear about less often. Most people are familiar with the standard retirement savings accounts — 401(k)s, Traditional IRAs and Roth IRAs. Each has its advantages and disadvantages when it comes to contribution limits, tax breaks, and the ability to maximize your portfolio. And many of these depend on where you’re at in your life, career, and finances. For instance, many financial advisors say Roth IRAs are a better bet for younger workers, and that IRAs, in general, are a better choice than an employer-sponsored 401(k) since they allow you to choose your provider and give you more investment options.

But there are a few other retirement savings account options you might not be aware of that could be better for you, financially. Two of them include the Simplified Employee Pension (SEP)-IRA and the Health Savings Account (HSA). Let’s look at how these retirement savings options work and who might (or might not) be the best candidate for them.

Simplified Employee Pension (SEP)-IRA

This one was new to me, so I’m guessing it could be new to you, too. This is probably because it doesn’t apply to you, but I’ll let you make that judgment.

The SEP-IRA is designed for solopreneurs or entrepreneurs with only a few employees. This retirement savings account has a higher annual contribution limit ($55,000 per year in 2018, and no more than 25% of your self-employment income) than traditional IRAs. That’s good news for business owners who want to maximize their retirement income.

This type of account is also unique in that the contributions you make won’t count against your IRA contribution limit because you’re making them as an employer, not an employee. In other words, you could have both types of accounts and still get the most bang for your retirement buck. And, finally, you’ll have more options and freedom of choice than you would with a 401(k).

Of course, there are downsides. The biggest one is for those who have employees. If you contribute a certain percentage of your income to a SEP-IRA and you have employees, you’re required to contribute the same amount to SEP-IRAs for each of them.

Basically, if you’re a solopreneur who is officially self-employed or has a significant side-gig, a SEP-IRA is worth looking into.

Health Savings Account (HSA)

Are you already questioning how an account that’s paired with a high-deductible insurance plan and is designed to offset out-of-pocket medical expenses could also be a valid retirement savings option? I was. The secret is that, during your working years, you can only use HSA contributions for qualifying medical expenses. But, after age 65, you can use the money for anything. Neat, huh?

Unlike its cousin, the flexible spending account (FSA), you don’t “use it or lose it,” so you can continue to grow the amount until retirement age. You also aren’t obligated to start withdrawing funds at age 65 if you don’t need it yet.

The coolest thing about HSAs is their tax break potential. Contributions to HSAs are pre-tax or tax-deductible, distributions are tax-free, and any dividends, interest, or gains you make are also untaxed. Some financial experts say this is one of the most tax-advantaged ways to save for retirement.

To open an HSA, you need to have a high-deductible health insurance plan with no other insurance on the side. You also can’t be eligible for Medicare or be claimed as a dependent on someone’s tax return. On the downside, high-deductible health plans can make it hard to pay for your medical expenses. If you have a lot of medical bills during your working years, the payoffs of an HSA after retirement might not be worth it to you.

Which Retirement Savings Option is Best for You?

These two options are just that – more potential ways to maximize your retirement savings now, and your income later down the road. Choosing a retirement savings vehicle is a very personal decision that draws on your age, where you’re at in your career, and your personal risk tolerance. It’s important to explore all your options, seek advice from trusted professionals, and ultimately, to remember that saving for retirement — in any fashion — is better than not saving at all.

Tagged as: 401k, HSA, IRA, Retirement

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.