U.S. Retirement Accounts Explained: Understanding 401(k)s, Roth 401(k)s, Traditional IRAs, and Roth IRAs

A 401(k) is an employer-sponsored retirement plan allowing employees to save and invest a portion of their paycheck before taxes. Contributions are often matched, up to a limit, by employers.

The name 401(k) comes from the section of the IRS code which covers the tax-effective accounts, and there are two types, Traditional and Roth, each with their own set of tax rules as outlined in the table below.

An Individual Retirement Account (IRA) is a private retirement plan which can be opened by an individual, usually through a bank or other financial institution. IRAs share many of the same tax benefits of 401(k)s and can offer a wider investment selection, but they are also subject to lower contribution limits.

Like 401(k)s, there are both Traditional IRAs and Roth IRAs available, with different tax treatment as outlined below.

Feature	Traditional 401(k)	Roth 401(k)	Traditional IRA	Roth IRA
Tax Treatment	Contributions are pre-tax; withdrawals are taxed	Contributions are after-tax; withdrawals are tax-free	Contributions are pre-tax or tax-deductible; withdrawals are taxed	Contributions are after-tax; withdrawals are tax-free
Income Limits	No	No	Yes - Deductibility may phase out at higher income levels	Yes - Contributions limited by income
Standard Contribution Limit (2025)	$23,500	$23,500	$7,000	$7,000
Employer Matching	Often available	Often available	Not applicable	Not applicable
Required Minimum Distributions (RMDs)	Yes	Yes	Yes	No

The Traditional 401(k) is a central pillar for retirement savings. As outlined in the table above, the ability to make contributions pre-tax helps reduce your taxable income and increase your investment amounts. Not only that, but tax on earnings of your investments within a 401(k) are deferred until withdrawal.

Many employers will also match additional contributions, providing not only an immediate boost to your retirement savings, but offering the potential to generate long-term compound growth on that money. 

The amount you can contribute to a Traditional 401(k) is reasonably high, especially compared to IRAs.

Ideal for: Individuals in higher tax brackets during their working years who expect to be in a lower tax bracket in retirement.

Considerations: Withdrawals are taxed as ordinary income, and early withdrawals before age 59½ may incur income tax as well as an additional 10% penalty.

Roth 401(k)s combine the high contribution limits of a 401(k) with the tax-free growth benefits of a Roth IRA. The key difference to a Traditional 401(k) is that you pay into a Roth 401(k) with after-tax money, but gain access to tax-free growth and withdrawals.

Ideal for: Younger workers or those in lower tax brackets who expect their tax rate to rise in retirement.

Considerations: Contributions reduce current disposable income due to after-tax funding.

A Traditional IRA offers tax-deferred growth and isn’t tied to your employer. Contributions made into a Traditional IRA may be tax-deductible depending on your income and whether you’re enrolled in a workplace retirement plan.

IRAs typically offer a greater level of investment choice than a 401(k).

Ideal for: Individuals who want additional tax-deferred savings beyond a 401(k).

Considerations: Income limits may reduce or eliminate deductibility if you’re covered by another retirement plan.

The Roth IRA is a standout for its tax-free withdrawals (after age 59½ and five years) and no RMDs as with other plans. The trade-off for tax-free withdrawals is the fact that contributions into a Roth IRA are not tax-deductible.

Because there are no RMDs, Roth IRAs can grow indefinitely without the need to sell down assets and withdraw funds you don’t need. This can make them a valuable tool for estate planning.

Ideal for: Individuals expecting higher taxes in retirement or looking to leave a tax-free inheritance.

Considerations: Income restrictions limit eligibility for high earners.

As you can see, each of these different account types come with their own set of pros and cons. It’s the main reason why there is no ‘best’ option when it comes to retirement planning. In fact, almost everyone saving for retirement is likely to be best served by using a combination of some or all of these accounts to meet their objectives.

For example, combining both Traditional and Roth accounts can help balance taxable and tax-free income in retirement. Taxable account withdrawals can be prioritised in years where taxable income is lower, while tax-free withdrawals can be relied on in years when tax liability is likely to be high.

However, there are two considerations you should always keep in mind to maximise your long-term growth potential:

For US citizens living abroad, such as in the UK or UAE, retirement planning can be a little bit more complicated. Transferring a US retirement account to a foreign pension scheme is often restricted (if it’s possible at all), and in some cases it might not be possible to transfer it back if your retirement plans change.

US citizens are also unique in that they remain liable for tax in the US regardless of their residence status. Although there are many double taxation agreements in place, residence status does bring into play the potential risk of double taxation. It’s an area where careful planning is needed to ensure your retirement strategy aligns with the tax treaties between the US and your current country of residence. 

Not only that, but you’ll need to reconcile your current living situation and where you plan to retire to help guide which US or overseas retirement accounts are best to contribute to.

Choosing the right mix of retirement accounts depends on your current financial situation, tax considerations, and long-term goals. Working with an adviser can help you create a tailored plan that optimises tax benefits and maximises growth potential.

At Hoxton Wealth, we specialise in retirement planning, with unique cross-border expertise for expats. Whether you’re evaluating your 401(k) contributions, considering a Roth conversion, or planning for a retirement abroad, our experts are here to guide you.

Get in touch today to get started on your personalised retirement strategy.