Unsure which retirement account to choose? We have some tips

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: @nprlifekit https://www.instagram.com/nprlifekit/?hl=en Sign up for our newsletter here. https://www.npr.org/newsletter/life-kit Have an episode idea or feedback you want to share? Email us at [email protected] mailto:[email protected] Support the show and listen to it sponsor-free by signing up for Life Kit+ at plus.npr.org/lifekit http://plus.npr.org/lifekit See pcm.adswizz.com https://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 https://www.npr.org/about-npr/179878450/privacy-policy

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  This message comes from Rosetta Stone. Rosetta Stone is designed to make language learning intuitive. It mimics how people naturally acquire speech as children, helping users read, write, and think in a second language. More at rosettastone.com.

• 0:15Marielle Segarra?

  You're listening to Life Kit from NPR.

• 0:23Marielle Segarra?

  Hey, it's Marielle. Tax day has 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.

• 0:40Speaker 02

  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.

• 0:53Marielle Segarra?

  This is Amanda Holden, financial educator and 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.

• 1:06Speaker 02

  What we know is that tax law in the US 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.

• 1:21Marielle Segarra?

  Spooky. 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.

• 1:44Speaker 03

  Stay tuned for the following announcements and messages from our sponsors. This message comes from ADT. It's back to school, back to work, back to cozy nights at home season. And ADT is here for every moment of it. They make it easy with professionally installed systems you can access right from the ADT Plus app. If you need help, their reps are on call 24/7 at the most company-operated monitoring centers in the industry. You deserve some cozy back-to-home time. When every second counts, count on ADT. Visit ADT.com today.

• 2:19Speaker 03

  This message comes from Rula. World Mental Health Day takes place in October, making it a great time to take that next step in getting support if you need it. Rula makes accessing quality mental health care affordable, with sessions costing an average of $15 with insurance. So turn off the talk track that's keeping you from progress, and head to rula.com. That's R-U-L-A dot com to find a therapist the easy way. This message comes from Google Workspace with Gemini. Ever notice how every new AI tool asks you to explain your business to it all over again? Google Workspace with Gemini skips that. You get Google's AI built right into the premium versions of Gmail, Google Docs, Sheets, and more.

• 3:03Speaker 03

  No new tools, no extra logins, just one subscription that gives you personalized AI right inside your actual workflow. Try Google Workspace with Gemini at g o o dot G L E slash Workspace with Gemini.

• 3:18Marielle Segarra?

  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.

• 3:43Speaker 04

  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.

• 3:54Marielle Segarra?

  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.

• 4:26Speaker 02

  Because, of course, they had to make multiple different types of retirement accounts. It couldn't just be simple.

• 4:32Marielle Segarra?

  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 Porty Brown in the Chicago area. He gave me an example.

• 4:51Speaker 05

  Let's just say I decided to contribute $20,000 to my 401K.

• 4:57Marielle Segarra?

  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.

• 5:11Speaker 05

  It would save you $5,000 in tax savings.

• 5:14Marielle Segarra?

  And then, after you invest the money, it grows tax-free.

• 5:17Speaker 05

  As it's growing, as it's earning dividends, interest, capital gains, and the value's going up, you're paying zero tax on any of that money in a given year.

• 5:27Marielle Segarra?

  So, that's the cool thing, right?

• 5:28Speaker 05

  In a way, you're using the government's money to help grow your retirement.

• 5:32Marielle Segarra?

  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 $1 million in their 401K, and they withdraw what they need to live their life.

• 5:54Speaker 05

  But they don't have the same level of income in that given year because, you know, now they're retired, maybe they have a little bit of, you know, investment income like interest, dividends, they got 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.

• 6:21Marielle Segarra?

  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.

• 6:58Speaker 03

  Stay tuned for the following announcements and messages from our sponsors.

• 7:03Speaker 00

  This message comes from Charles Schwab with their original podcast, Choiceology. Choiceology is a show about the psychology and economics behind people's decisions. Download the latest episode and subscribe at schwab.com/podcast.

• 7:17Speaker 03

  This message comes from Quo. You're on a job, in a meeting, slammed, and a customer calls. If nobody picks up, they go to your competitor. That's why over 90,000 companies choose Quo. The business phone system built for busy teams. Smart call routing sends calls to the right person. Shared numbers let your team cover for each other. And an AI agent picks up when nobody can, capturing every lead so nothing falls through the cracks. Always say hello with Quo. Try it free at quo.com/NPR.

• 7:50Marielle Segarra?

  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.

• 8:05Speaker 02

  Roth is the reverse. You are paying income taxes upfront, but later on, you won't have to pay any income taxes when you pull the money out.

• 8:14Marielle Segarra?

  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.

• 8:26Speaker 05

  Let's just say an 18-year-old is working through school and they're making a 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 $2 or $3 million 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, that amount of income coming out, 50,000, 100,000, whatever, getting given here, tax-free.

• 9:03Marielle Segarra?

  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. Here are 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 upfront, but then you'll never have to pay taxes on all your investment gains.

• 9:47Marielle Segarra?

  Now Amanda says which type of account you should prioritize right now, traditional or Roth, depends in part on your current tax rate.

• 9:55Speaker 02

  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.

• 10:15Marielle Segarra?

  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.

• 10:23Speaker 02

  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.

• 10:36Marielle Segarra?

  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.

• 10:45Speaker 02

  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.

• 11:07Marielle Segarra?

  Mark also recommends putting money in both because that gives you flexibility in the future.

• 11:11Speaker 05

  The more options you have, the more you control you have in retirement, the better you're off you're going to be.

• 11:16Marielle Segarra?

  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 game this based on your income, but also it's better to have any retirement account than 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

• 11:57Marielle Segarra?

  tax benefits. Takeaway 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 upfront, 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 sweat which one to pick or to prioritize, traditional or Roth.

• 12:40Marielle Segarra?

  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.

• 12:59Marielle Segarra?

  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 on popular Life Kit topics. You can sign up today at plus.npr.org/lifekit. This episode of Life Kit was produced by Sylvie Douglas. Our digital editor is Malika Greb, and our visuals editor is CJ Riechelmann. 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 Hyenas and co-Takasugi Chernovin. I'm Mary El Segarra. Thanks for listening.

• 13:48Speaker 00

  Stay tuned for the following announcements and messages from our sponsors. This message comes from Charles Schwab with their original podcast, Choiceology. Choiceology is a show about the psychology and economics behind people's decisions. Download the latest episode and subscribe at schwab.com/podcast. This message comes from Mint Mobile. While others have been hiking your bill, Mint Mobile has kept their wireless plans starting at $15 a month. Switch to Mint Mobile and get three months of premium wireless service for $15 a month. Go to mintmobile.com/switch. Upfront payment of $45 for three-month plan required. $15 per month equivalent. New customer offer, first three months only, then full price plan options available. Taxes and fees extra.