Chapter 10: Retirement Accounts — The $1 Million Decade

This post is Chapter 10 of 14 of the book Keep More of What You Earn — a plain-English guide to US taxes.

Two 25-year-olds start at the same company at the same $60,000 salary. Alex enrolls in the 401(k) on day one: 10% of pay, capturing the full employer match. Jordan means to enroll “once things settle down” — and finally does at 35, contributing the same 10%.

Both retire at 65. Assuming 7% average annual growth, Alex has about $2.1 million. Jordan has about $1.0 million.

Jordan contributed for 30 years. Alex contributed for 40. That extra decade at the start — worth roughly $1 million — is compound growth doing what it does: turning time into money. This chapter: which accounts, how much, traditional or Roth, and the 2026 limits.

The 401(k): free money with a deadline

If your employer offers a 401(k) — or a 403(b) or 457(b) — with a match, this is the only free money in personal finance. Typical formula: employer matches 50% of your contributions up to 6% of salary. On a $70,000 salary, contributing 6% ($4,200) gets you $2,100 of employer money — an instant 50% return before any growth. The minimum contribution for anyone with a match is whatever captures 100% of it.

2026 contribution limits (IRS Notice 2025-67): employee elective deferral $24,500 (under 50); catch-up at 50+ adds $8,000 ($32,500 total); “super catch-up” at ages 60–63 adds $11,250 ($35,750 total). Total annual additions (you + employer): $72,000.

Two 2026 rules to know: the ages-60–63 “super catch-up” comes from SECURE 2.0. And if your prior-year wages exceeded $150,000, your catch-up contributions must go to Roth (after-tax), not traditional.

Vesting: the match might not be yours immediately — many employers vest it over 2–6 years. Know your schedule before changing jobs.

Traditional vs. Roth: the only question that matters

• Traditional: deduct now, pay tax on withdrawals later.
• Roth: no deduction now, tax-free withdrawals later (after 59½ and five years).

The decision: will your tax rate be higher now or in retirement? Pay tax in whichever era the rate is lower.

• Young, early-career, 12% bracket? Roth — buy tax-free withdrawals at the cheapest rate you’ll ever see.
• Peak earning years, 32–37% bracket? Traditional — deduct at 35%, withdraw at ~22–24%.
• Middle years, 22–24%? Split, or Roth for young workers and traditional once established.

Example: Maya, 28, 12% bracket, $6,000 to save. Roth: pays $720 now, $6,000 grows 35 years at 7% → ~$64,000 all tax-free. Traditional: same growth, taxed at 22% in retirement → keeps ~$50,000. Roth wins by ~$14,000 — because she bought out the IRS at 12% instead of 22%.

IRAs: your account, your control

The IRA is yours — opened at any brokerage, 2026 limits $7,500 (under 50) or $8,600 (50+). Two gates:

Gate 1 — Roth IRA eligibility: phases out at $153,000–$168,000 MAGI (single) and $242,000–$252,000 (MFJ) for 2026. Above that, the backdoor Roth (nondeductible traditional contribution → immediate conversion) remains legal and routine.

Gate 2 — Traditional IRA deductibility: only matters if you’re covered by a workplace plan: deduction phases out at $81,000–$91,000 (single) or $129,000–$149,000 (MFJ) for 2026. Not covered? Deduct the full amount regardless of income.

The trap: a high earner with a 401(k) contributes to a traditional IRA, can’t deduct it, and doesn’t file Form 8606 — then pays tax on it again at withdrawal. File the 8606.

Deadline: contribute for 2026 until April 15, 2027.

The Saver’s Credit: the government’s match for modest incomes

The Saver’s Credit is Congress matching your retirement contribution — 10–50% of up to $2,000 in contributions ($4,000 joint). For 2026, available up to $80,500 (MFJ), $60,375 (HoH), or $40,250 (single) AGI.

Self-employed? Your limits are bigger

• Solo 401(k): contribute as employee ($24,500) and as employer (up to 25% of compensation), to the $72,000 cap. A freelancer netting $100,000 can shelter roughly $40,000+.
• SEP IRA: employer-only contributions up to 25% of compensation. Simpler, slightly less flexible.

The exit rules: RMDs, early withdrawals, and the 10% penalty

• 59½: withdraw before it and you generally owe income tax plus a 10% early-withdrawal penalty. Exceptions: disability, first-time home purchase (IRA, $10,000 lifetime), higher education, birth/adoption ($5,000), rule-of-55. Roth contributions can be withdrawn anytime, tax- and penalty-free.
• RMDs: starting at 73 (born 1951–1959) or 75 (born 1960+), traditional accounts force annual withdrawals. Miss one and the penalty is 25% of the amount. Roth IRAs have no lifetime RMDs.
• Rollovers: change jobs, roll the 401(k) directly to an IRA or the new plan — direct trustee-to-trustee transfer avoids the 60-day dance and 20% withholding.

The Roth conversion: paying tax on purpose

Convert traditional money to Roth in low-income years — between jobs, early retirement before Social Security, a sabbatical. Convert $30,000 in a 12% year instead of withdrawing at 24% later: a 12-point discount. Mind the side effects — a big conversion raises MAGI, which can shrink credits, raise Medicare premiums two years later, and push you through phaseouts.

Beneficiaries: the form that overrides your will

Your 401(k)/IRA beneficiary designation controls who gets the money, overriding your will entirely. Review beneficiaries after every marriage, divorce, birth, and death. A surviving spouse can roll an inherited IRA into their own; most other heirs face the 10-year rule.

Key takeaways

1. The employer match is the only free money in finance — capture 100% of it first. 2026 limits: $24,500 (+$8,000 at 50+, +$11,250 at 60–63).
2. Traditional vs. Roth = today’s rate vs. retirement’s rate. Lower now → Roth; higher now → traditional.
3. IRA limits for 2026: $7,500/$8,600. Backdoor Roths are legal and routine above the income gates.
4. The Saver’s Credit (up to 50%) stacks on top of the deduction for modest-income savers.
5. RMDs start at 73/75 with a 25% penalty for missing them; Roth IRAs have no lifetime RMDs.
6. Time beats timing — start now, automate increases, let compounding work.
7. Review beneficiaries after every life event.

Next: Chapter 11 — HSAs, FSAs, and the Family Credits.