Life Kit - Unsure which retirement account to choose? We have some tips

Episode Date: May 7, 2026

Retirement accounts are not just a vehicle to let your money grow over time for when you're ready to stop working. They're also a tax shelter. In this episode, we talk about how much you can expect to save in taxes, the difference between pre-tax and post-tax accounts, and how to decide which to prioritize. Spoiler: when in doubt, just pick one and get started.Follow us on Instagram: @nprlifekitSign up for our newsletter here.Have an episode idea or feedback you want to share? Email us at [e-mail] the show and listen to it sponsor-free by signing up for Life Kit+ at plus.npr.org/lifekitSee pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences.NPR Privacy Policy

You're listening to Life Kit from NPR. Hey, it's Mariel. Tax Day is passed, so you don't have to think about your taxes for another year, right? Nah, that's wrong. You could be making better choices now that'll save you money in taxes in 2026, like putting some money into a retirement account. The taxation of retirement accounts is probably the most misunderstood concept of investing. And what I hate is that it creates this real roadblock to people getting started.

This is Amanda Holden, financial educator, an author of the book, How to Be a Rich Old Lady. Now, the thing is, many of us were never taught how to do all this. And even if we know a little bit about it, the details get complicated. What we know is that tax law in the U.S. is like this haunted patchwork doll that has been added to and amended over time. and you can think of retirement accounts as just one cursed limb of the creation. But don't worry, on this episode of Life Kit, I'm going to walk you through this. We will talk about how retirement accounts save you money on taxes, what the two main types of accounts are, and why it often doesn't matter that much which one you prioritize.

That's after the break. As a financial educator, Amanda is constantly getting this question. What's better, a 401K or a Roth IRA? Her answer? All retirement accounts are good. Retirement accounts are basically bank accounts that hold investments. And one reason everybody's always telling you to put money in them is that the stock market allows you to generate much higher returns than if you just put your savings in a regular bank account. This is former Planet Money co-host, Mary Childs. As the economy around you is growing and more transactions are happening and businesses are growing, stocks are going to be going up and you want to be a part of that.

You don't want to get left behind. So that's a reason to invest in general. A good one. But the reason to put your retirement savings into one of these special retirement-specific accounts, that is all about taxes. Amanda writes in her book that you can think of retirement accounts as a kind of tax shelter for your investments, a container where your money can grow shielded from taxes while it does. And that's takeaway one. Retirement accounts are not just a vehicle to let your money grow over time for when you're ready to stop working. They also have tax benefits. Now, there are two main types of retirement accounts. Because, of course, they had to make multiple different types of retirement accounts. It couldn't just be simple. On the one hand, you have your traditional accounts. That could be an IRA, a 401k, a 403B, something like that. With these, you take a certain amount of your income and shield it from taxes.

Mark Gallegos is a CPA and a tax partner at the accounting firm Portie Brown in the Chicago area. He gave me an example. Let's just say I decided to contribute $20,000 to my 401K. And let's say he currently pays about 25% of his income to the government in taxes. Now he won't have to pay taxes on $20,000 of that income because it's going into a tax shelter. So the math is 25% savings on $20,000. It would save you $5,000 in tax savings. And then after you invest the money, it grows tax-free.

As it's growing, as it's earning dividends, interest, capital gains, and the values going up, you're paying zero tax on any of that money in a given year. So that's the cool thing, right? In a way, you're using the government's money to help grow your retirement. You will only pay taxes once you start making withdrawals, ideally in retirement. The reason this setup works to a lot of people's advantage is that you will very likely have a lower tax rate when you retire than you do now because your income will probably be lower.

So take somebody with a 25% tax rate. they retire with a million dollars in their 401k and they withdraw what they need to live their life. But they don't have the same level of income in that given year because now they're retired. Maybe they have a little bit of investment income like interest dividends. They get their social security, but their income is substantially lower. So maybe they're in the 10% tax bracket. So that's the benefit. When you pull the money out, your income is substantially lower because you're really not working anymore, hypothetically.

Therefore, you're paying tax on this grown nest egg. at a lower tax rate. Takeaway two, with the traditional kind of retirement account, the 401K, the 403B, the IRA, you take a certain amount of your income and you shield it from taxes. Then your money grows tax-free, and you only pay taxes when you start withdrawing it later on. And the thinking here is that you'll likely have a lower tax rate in retirement

than you do now, because your income will probably be lower. After the break, I'll walk you through the other main type of retirement account and its benefits, and we'll also talk about how to choose between them. Spoiler, you don't necessarily have to choose. Before the break, we talked about traditional retirement plans. On the other hand, you have Roth accounts, and you'll recognize these because they all say Roth in the title.

Roth IRA, Roth 401K, Roth 403B. Roth is the reverse. You are paying income taxes up front, but later on, you won't have to pay any income taxes when you pull the money out. Which means you'll never pay taxes on your investment profits. Roth accounts are an especially good option for folks who currently have a low tax rate, for instance because they have a low income.

Here's one scenario Mark gave me. Let's just say an 18-year-old is working through school and they're making part-time job and they decide, hey, I've got some earned income. I'm going to contribute a bunch of it to my Roth IRA that I just set up and then I start working and I got a Roth 401k and I'm maxing this Roth out along the way. And now that money grows to two or three million dollars by the time they're 65 years old. Okay. When they decide to start taking that money out when they're retired, guess what?

They didn't get a deduction along the way for any of that because it's after tax money. But that amount of income coming out, 50,000, 100,000, whatever you're in a given year, tax-free. But that's not the only reason to put money in a Roth. Here's another advantage they have over traditional plans. If you make early withdrawals from a traditional plan, you'll pay a penalty. But because you've already paid taxes on your contributions to a Roth, you can withdraw those at any time, penalty-free. There are more restrictions about when you can withdraw the investment gains, your incentivized to wait until retirement for that money. There are other differences between the accounts, too, having to do with income limits and contribution limits.

We won't get into those details here because they're very complicated and depend in part on what plans are available to you. But takeaway three, Roth retirement accounts are also tax-advantaged, but they work in a different way. You pay taxes up front, but then you'll never have to pay taxes on all your investment gains. Now, Amanda says which type of account you should prioritize right now, traditional or Roth, depends in part on your current tax rate. If you are a higher earner right now, it may make sense to push those taxes until later when you're going to have a much lower tax rate in retirement. If you're somebody that's not earning a lot right now, hey, go ahead and pay the taxes. give this gift to your future self and never have to worry about income taxes again on that money. But keep in mind, we can't tell the future. Tax law changes a lot. We don't know what rates will be when you retire.

So she says, we can debate all day about whether Roth or traditional is better, but I think it obfuscates the point, which is that all retirement accounts are good because all of them allow you to grow your money tax-free. Also, Amanda says when you game this out using different scenarios, a lot of the time you end up with a similar amount of money in the end, whether you used a traditional plan or a Roth. Maybe the best thing we can do is give ourselves a little bit of tax diversification and do some of both. But the best thing you can do is not let it be a roadblock to getting started and just pick one and get to moving because the much more important thing is what is happening inside of those accounts and the investing happening. inside of those accounts. Mark also recommends putting money in both because that gives you flexibility in the future. The more options you have, the more you control you have in retirement, the better you're going to be. One quick note here. If your employer offers you a retirement match, that's free money. Invest in that account to get the full match. All right, so takeaway four

is don't sweat which type of retirement account to pick, traditional or Roth. Yes, you can gain this based on your income, but also it's better to have any retirement account. then no retirement account. Probably the best thing you can do is put money in both. That gives you more options down the line. But if you take one thing from this episode, it's don't let confusion stop you from getting started. Okay, let's do a quick recap.

Takeaway one. Retirement accounts are not just a vehicle to let your money grow over time for when you're ready to stop working. They also have tax benefits. Take away two, with traditional retirement accounts, the 401K, 403B, IRA, you take a certain amount of your income and shield it from taxes. Then your money grows tax-free and you only pay taxes when you start withdrawing money later on. The thinking here is that you'll likely have a lower tax rate

in retirement than you do now because your income will probably be lower. Takeaway three, Roth retirement accounts are the reverse. You pay taxes up front, but then you'll never have to pay taxes on all your investment gains. They're also nice because you can withdraw your contributions at any time without penalty. Takeaway four, don't say, sweat which one to pick or to prioritize, traditional or Roth. Yes, you can game this based on your income, but it's also better to have any retirement account than no retirement account. And the best thing you can do is get started and consider putting money in both. Oh, and of course, take advantage of any employer match that you're offered. Think of that as part of your salary

that you have to sign up for. Hey, before we go, have you heard of Life Kit Plus? It allows you to easily access the best parts of Life Kit with our themed curated playlists. lists on popular Life Kit topics. You can sign up today at plus.npr.org slash LifeKit. This episode of Life Kit was produced by Sylvie Douglas. Our digital editor is Malika Grieb, and our visuals editor is C.J. Riegel. Megan Kane is our senior supervising editor, and Beth Donovan is our executive producer. Our production team also includes Andy Tagle, Claire Marie Schneider, and Margaret Serino. Engineering support comes from Nisha Highness and Co. Takasugi Chernovin. I'm Mariel Segarra. Thanks for listening.

Thank you.