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How to Save for Retirement: 5 Essential Accounts to Consider

Understanding how to save for retirement does not have to be complicated. This article outlines the essential investment account options at your disposal to help build your retirement savings.

Articles by Fred Egler, CFP®

By Fred Egler, CFP®
Financial Planner, Betterment
Published: November 7, 2014 | Updated: April 1, 2019

You can contribute to a 401(k), an IRA, and a Health Savings Account all in the same year.

The annual contribution limits for retirement accounts have increased for 2019.

Saving for retirement can seem daunting and complicated, but it doesn’t have to be. If you are wondering where to squirrel away money when it comes to saving as tax-efficiently as possible, consider these five essential retirement account types.

Traditional 401(k)

  • The most common type of workplace retirement account for investors is a Traditional 401(k). Contributions to a Traditional 401(k) are made with pre-tax dollars, and the money is normally deducted directly from your paycheck before the paycheck reaches you. The result is that Traditional 401(k) contributions reduce your amount of taxable income for the current year. This holds true for Traditional 403(b)s too.

Money in a Traditional 401(k) grows tax-free, and the distributions are taxed when you withdraw the money during retirement. Therefore, it may be smart to contribute to a Traditional 401(k) if you think you will be in a lower tax bracket in retirement than you are currently in now.

Another good reason to contribute to a Traditional 401(k) is the possibility of an employer match. Your employer may match the contributions you make to your Traditional 401(k) plan up to a certain percentage. That’s free money—and no one should pass that up.

In 2019, the maximum amount you can contribute to a Traditional 401(k) is $19,000 if you are under age 50. If you are over age 50, you can contribute an additional $6,000, bringing your total limit to $25,000. That’s $792 to $1,042 per paycheck, depending on your age.

The IRS generally requires you to start taking required minimum distributions from your Traditional 401(k) either when you turn 70 ½ or when you retire from your job if you are older than 70 ½.

Roth 401(k)

  • A less common but increasingly popular workplace retirement account is a Roth 401(k). These accounts have the same contribution limits as Traditional 401(k)s. The main difference is when the funds in Roth 401(k)s are actually taxed. Unlike Traditional 401(k)s, Roth 401(k)s are funded with contributions that have already been taxed. This means that Roth 401(k) contributions do not reduce your taxable income.

The money in a Roth 401(k) grows tax-free, and when you withdraw the money in retirement, the distributions are also tax-free. If you think you are going to be in a higher tax bracket in retirement—or generally think tax rates are going to increase in the future—Roth 401(k) contributions may be the right choice for you.

If your employer offers a 401(k) match then you will still get the match if you make Roth 401(k) contributions, however, the matches will be placed in a Traditional 401(k) account.

Keep in mind, $19,000 (and $25,000 for people age 50 and over) is the total 401(k) contribution limit across Traditional and Roth 401(k)s: —you cannot contribute both $19,000 to a Traditional 401(k) and $19,000 to a Roth 401(k). You can split your contributions so that a portion goes to the Traditional and a portion goes to the Roth, but you cannot contribute more than $19,000 (or $25,000) in total.

Traditional IRA

  • IRAs (Individual Retirement Accounts) are not offered by an employer, which means you have more control and flexibility with the investments and the provider you choose. As long as you earn taxable income you can contribute to a Traditional IRA, and the maximum contribution you can make for 2019 is $6,000. If you are over age 50, you can contribute $7,000.

Money in a Traditional IRA grows tax-free, and is normally taxed when you take distributions in retirement. Additionally, the IRS generally requires you to start taking distributions from a Traditional IRA starting at age 70 ½.

You can also get a tax deduction on your Traditional IRA contributions in the year you make them. Your ability to deduct, though, can depend on if:

Some investors choose to roll over their 401(k)s to a Traditional IRA in order to consolidate their investments at the provider of their choice, or to switch to a provider with a lower fee. For investors looking to make backdoor Roth conversions, it is wise to move an old 401(k) into a current 401(k) if that option exists, instead of a Traditional IRA.

Roth IRA

  • Unlike Traditional IRAs, Roth IRA contributions offer no ability to receive a tax deduction. You contribute to a Roth IRA with after-tax dollars, and when you take distributions from your Roth IRA in retirement they are tax-free.

Similar to Roth 401(k)s, making Roth IRA contributions is beneficial if you think you will be in a higher tax bracket in retirement than you are now. Another perk is flexibility. Roth IRAs do not require you to take minimum distributions once you turn age 70 ½ like Traditional IRAs do. Additionally, you can withdraw your contributions to a Roth IRA at any time without taxes or penalties.

If you make over a certain amount of income, you cannot contribute to a Roth IRA directly. For single tax filers, once your modified adjusted gross income is above $122,000, you can only make a partial Roth IRA contribution, and if you make more than $137,000, you cannot contribute directly to a Roth IRA at all. If you are a married filing jointly tax filer, the comparable range is $193,000 to $203,000.

Roth IRAs have the same contribution limits as Traditional IRAs ($6,000 or $7,000, depending on age), but that limit is the maximum amount total across both types—meaning you cannot contribute the maximum amount of $6,000 (or $7,000) to both a Roth IRA and a Traditional IRA in the same year.

Health Savings Account (HSA)

  • Health Savings Accounts (HSAs) should be used as an option to set aside money for retirement if you have already filled up all your other retirement account options. Contributions to an HSA are tax-deductible, and distributions from an HSA are tax-free if you use the money for medical expenses or related costs.

If you allow your HSA to invest and grow over time you can withdraw the funds at age 65 without triggering a penalty. Distributions from your HSA at age 65 or over would be treated similarly to distributions from a Traditional IRA.

In 2019, you can contribute up to $3,500 to an HSA if you are a single tax filer, and up to $7,000 if you have a family HSA. Keep in mind that you can only contribute to an HSA if you are enrolled in a high-deductible health plan through you or your spouse’s workplace.

Try our Retirement Savings Calculator

Need Advice?

Within a Betterment account, we can provide additional advice regarding which accounts you should consider funding and in what order. You can even sync up your 401(k)s and other financial accounts to see an overall picture of your finances. Get started or log in to complete your retirement plan and see personalized savings advice.

Our licensed financial experts also offer advice packages for retirement planning and more.

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