Jimmie Plaskey, CFP^®, CDFA^®, walks through the main types of tax-advantaged retirement accounts, common mistakes to be aware of, and strategies for managing contributions and withdrawals at every stage of life. 

A Guide to Tax-Advantaged Retirement Accounts

One of the things I emphasize most with clients, especially those earlier in their careers, is the importance of really understanding what retirement accounts are and how they work. For younger investors, that means going beyond the employer match and thinking about budgets, goals, and the difference between Roth and pre-tax contributions. For those closer to retirement or already in it, it means understanding how withdrawals, required minimum distributions, and tax brackets interact, and why those decisions can affect not only your own retirement but also what your heirs inherit.

Here are some of the key points about tax-advantaged retirement accounts that I cover in this blog:

• Roth vs. pre-tax in simple terms: Think of it as seeds and the harvest. With a Roth account, you pay tax on the seeds and keep the harvest; with pre-tax accounts, you plant everything and pay tax on the harvest later.
• Start with savings, not spending: Most Americans spend first and save second. Flipping that approach, even with small automatic increases to your 401(k) contribution each year, can make a meaningful difference over time.
• Don't leave money on the table: Contributing just enough to get the employer match may mean missing an opportunity to save more. Not understanding your vesting schedule could mean walking away from tens of thousands of dollars.
• RMDs can limit your flexibility: Required minimum distributions can push retirees into higher tax brackets, and by the time they begin, the options for managing that impact may be more limited.

• Your account type affects your heirs: Pre-tax retirement accounts inherited by children are fully taxable to them within a 10-year window, which can create a significant tax burden during their highest-earning years.

Every person's situation is different, and the right approach depends on your income, your goals, your tax bracket, and where you are in life. At EP Wealth, we work with clients at every stage to help them understand their options and build a strategy that fits.

Save First, Spend Second

If there's one piece of advice I find myself coming back to with younger investors, it's this: save first, spend second. Most Americans do it the other way around. They spend what they spend, and whatever's left over goes into savings. In my view, that's backwards.

It's one of the reasons I'm a big advocate of 401(k) contributions. The money comes out of your paycheck before you ever see it, which means you're saving before you have a chance to spend. And for younger investors who are just getting started, there's a simple strategy that can make a real difference over time: most 401(k) plans allow you to set automatic annual contribution increases. So if you're getting a 3% raise each year, consider increasing your 401(k) contribution by 1%. Within 10 years, you've gone from 6% to 16%, and it hasn't meaningfully affected your day-to-day budget.

The goal is to build your budget around what's left after saving, not the other way around. The earlier you start, the more time those savings have to grow.

The Main Types of Tax-Advantaged Retirement Accounts

Retirement accounts generally fall into two broad categories: individual accounts and employer-sponsored accounts. Within each, the key distinction is whether your contributions are pre-tax (meaning you defer taxes now and pay them when you withdraw the money) or Roth (meaning you pay taxes now and withdraw the money tax-free later, if you qualify).

Individual Accounts: Traditional IRA and Roth IRA

A traditional IRA allows you to make contributions on a pre-tax basis, and the money grows tax-deferred until you withdraw it in retirement, at which point it's taxed as ordinary income. Depending on your income and whether you have access to an employer-sponsored plan, there may be limits on how much of your contribution is tax-deductible.

A Roth IRA works in the opposite direction. Contributions are made with after-tax dollars, but the account grows tax-free and withdrawals in retirement can potentially be tax-free. There are income limitations for contributing directly to a Roth IRA, but a strategy called a backdoor Roth contribution may allow higher earners to fund one indirectly. This is something I often discuss with mid-career clients as part of their tax planning.

One rule worth noting: you don't have to be the one earning the income to contribute to an IRA. If one spouse is a homemaker and the other is the primary earner, the homemaker can still contribute to a Roth IRA based on the earning spouse's income. It's a useful option for families where one partner has stepped away from the workforce.

Employer-Sponsored Plans: 401(k), 403(b), and 457

Employer-sponsored plans are where a lot of retirement savings happen, and for good reason. There are no income limitations for contributing, and both pre-tax and Roth options are typically available.

Many employers also offer a matching contribution. For example, they might match 3% to 6% of your salary. But you only receive that match if you contribute to the plan yourself. If you're not participating, or not contributing enough to qualify for the full match, you're leaving free money on the table.

For 2026, the contribution limits for a 401(k) are:

• Standard contribution: $24,500
• Catch-up contribution (age 50+): an additional $8,000, for a total of $32,500
• Super catch-up (ages 60–63): $11,250 (replaces the standard catch-up), for a total of $35,750

One recent change worth noting: under the SECURE 2.0 Act, catch-up contributions must now be made as Roth (after-tax) contributions for employees who earned more than $150,000 in the prior year. That means higher-earning employees in their 50s and 60s — who are often in the highest tax brackets of their careers — would be paying taxes on those additional contributions at their current, higher rate rather than deferring them. For some, that tradeoff may still be worthwhile. For others, it may make sense to explore other savings vehicles for that portion of their contributions.

Small Business Options: SEP IRA and SIMPLE IRA

For small business owners, there are a couple of additional account types that may be worth considering.

• A SEP IRA is designed primarily for businesses with few or no employees. It allows contributions of up to 25% of income, up to $72,000, but the contributions are employer-only, and they must be equal across all employees. That structure can make a SEP less practical for business owners who earn more than their staff and want to contribute more for themselves.
• A SIMPLE IRA may be a more cost-effective option for smaller businesses. Both employees and employers can make contributions, and while these are primarily pre-tax accounts, Roth options may be available depending on the plan.

Tax-Advantaged Retirement Accounts at a Glance

Contribution limits and income thresholds are based on 2026 figures and are subject to change. We recommend checking with a financial advisor to confirm the current limits that apply to your situation.

Roth vs. Pre-Tax: The Seeds and the Harvest

One of the most common questions I get from clients is whether they should be contributing to a Roth account or a pre-tax account. I use a simple analogy to explain the difference.

Think of it like a farmer with seeds and a harvest. When you contribute to a Roth account, you're paying your tax on the seeds. You pay upfront, plant what's left, and you keep the entire harvest, potentially tax-free. When you contribute to a pre-tax account, you keep all of the seeds. You plant everything, and then you pay your tax on the harvest when you take it out during retirement.

The question is: which is cheaper — paying tax on the seeds, or paying tax on the harvest?

That depends on your tax bracket now versus what it may be when you start withdrawing. And the answer shifts depending on where you are in life.

For someone early in their career with a lower income, a Roth often makes more sense. The tax cost of contributing after-tax dollars is relatively small, and the money has decades to grow tax-free. I'm a strong advocate for Roth contributions for younger investors, even those with somewhat higher incomes, because of the power of compounding over 30 or 40 years. When you think about the long-term growth potential, paying taxes on a smaller amount now to avoid paying taxes on a much larger amount later can be a big advantage.

For mid-career clients with higher incomes, the conversation starts to shift. Pre-tax contributions become more attractive because the tax savings today are more significant. This is also the stage where strategies like backdoor Roth contributions may come into play.

For those approaching or in retirement, pre-tax may still be the primary contribution strategy, but Roth conversions — which I'll discuss in more detail later — can play an important role in managing future tax exposure.

It's worth noting that the original premise behind tax-deferred retirement accounts was that you'd earn more during your working years and less in retirement, making it advantageous to defer taxes. But that's not always how it plays out. Some retirees maintain a lifestyle that produces a higher income in retirement than they had in their 20s or 30s. That's where planning ahead — and understanding which "bucket" your money is in — becomes especially important. 

Common Mistakes and Oversights

Over the years, I've seen a number of misconceptions that can trip people up when it comes to handling their retirement accounts.

Not Contributing Enough — or Not Contributing at All

This is the one I see most often with younger investors. Either they're not contributing to their 401(k) at all because they don't fully understand how it works, or they're contributing just enough to get the employer match because that's what their colleagues or their parents told them to do. The water cooler conversation might say "put in 6%," but their budget and goals might support saving more.

And for those who aren't contributing at all, missing the employer match means effectively leaving part of your pay behind.

Not Investing the Funds Inside the Account

A related mistake is contributing to a 401(k) without ever selecting an investment allocation. When that happens, the money may sit in a money market or cash account, earning very little.

I’ve seen this firsthand in a situation where someone started a 401(k) in 2008, when the market was in a difficult stretch, and the entire account sat in cash from 2008 to 2017. During that time, the market experienced periods of significant growth, and they missed all of it.

For those who aren't sure how to choose investments, most 401(k) plans now offer target date funds. These are single funds with a built-in asset allocation that adjusts automatically as the target retirement year approaches. A target 2065 fund, for example, would be more aggressively invested today and gradually become more conservative as 2065 gets closer. It's a simpler way to get invested without having to build a custom allocation from scratch.

Losing Track of Old 401(k) Accounts

Employees who change jobs frequently, which is increasingly common, may leave behind 401(k) accounts at former employers and forget about them. Without active attention, those accounts may not be allocated in a way that aligns with your current goals or risk profile.

When you leave an employer, you generally have four options for your 401(k):

• Leave it with the former employer
• Roll it into your new employer's 401(k)
• Roll it into an IRA, which you can manage yourself or have professionally managed
• Cash it out, which triggers full taxation and potential penalties if you're under age 59½

The first three are tax-free transactions. The fourth is what I jokingly tell clients is the "cash out and go to Vegas" option. You can do it, but the tax consequences are significant.

For most people, rolling the account into an IRA tends to be an approach I recommend. It gives you more control, a broader range of investment options, and the ability to consolidate your retirement savings in one place.

Not Understanding the Vesting Schedule

When your employer contributes matching funds to your 401(k), you don't necessarily get to keep all of it right away. A vesting schedule ties how much of that match you get to keep to how long you stay with the company.

Vesting can be structured as a cliff. For example, you're 0% vested until you've been employed for 5 years, at which point you're 100% vested. Or it can be graded, increasing incrementally over time (20%, 40%, 60%, 80%, 100%).

I've seen cases where an employee left a job just weeks before reaching full vesting, walking away from thousands — or even tens of thousands — of dollars in employer contributions. I understand that when someone decides to leave a job, the vesting schedule isn't always the deciding factor. But it's worth checking before you make the move.

The same concept applies to stock options at publicly traded companies. Employees at companies like Amazon or Google may have several years of stock grants still in the process of vesting. Leaving means walking away from that unvested value.

With my own clients, I make a point of educating them about their vesting status. Sometimes they say, "Jimmie, I hear you, but I'm leaving tomorrow." And that's fine. At least they're making an informed decision.

Later-Stage Considerations: RMDs, Inheritance, and Charitable Giving

For clients who are near retirement or already there, the planning conversation shifts. The focus moves from building savings to managing what you've accumulated. That includes how you withdraw from your accounts, how those withdrawals affect your tax bracket, and what happens to the money you don't spend when it passes to your heirs.

Required Minimum Distributions and Roth Conversions

Once you reach age 73 (or 75 if born after 1960), the IRS requires you to begin taking distributions from your pre-tax retirement accounts. These are called required minimum distributions, or RMDs. The amount you're required to withdraw each year is determined by a formula known as the uniform life table, which factors in your account balance and your age.

The way I explain it to clients: you've deferred your taxes long enough, and now Uncle Sam's hands are out. It's time to start paying.

The challenge is that RMDs can push you into a higher tax bracket, and once they've started, your ability to manage that impact becomes more limited. I have a client in his mid-70s with a few million dollars in IRAs whose RMD is $450,000 a year. That puts him in the highest tax bracket, and he doesn't have much flexibility to change it. He told me, looking back, he wishes he had explored Roth conversions earlier in retirement planning.

Roth conversions involve moving money from a pre-tax account into a Roth account. It's a taxable transaction in the year you do it, but once the money is in the Roth, it grows tax-free and is no longer subject to RMDs. The early years of retirement, especially if you’re not taking Social Security yet, are often a period when your taxable income is temporarily lower than it will be later when RMDs kick in. That can create a window to convert at a lower tax rate. And every dollar you move into a Roth is a dollar that's no longer in your pre-tax accounts, which means a smaller balance for future RMDs to be calculated against.

What Your Heirs Inherit

The type of retirement account you hold also affects the tax treatment your heirs will face. Inherited Roth accounts typically pass to heirs tax-free. The funds must be distributed within 10 years under the current rule, but no taxes are owed. Inherited pre-tax accounts — traditional IRAs, 401(k)s, rollover IRAs — are fully taxable to the heirs as ordinary income, also within a 10-year window.

That can create a real burden. Say a couple in their late 80s leaves $3 million in pre-tax accounts to two children who are in their 50s and likely in their highest-earning years. Each child inherits $1.5 million that must come out and be taxed as ordinary income within a decade. Do they take $150,000 a year and bump up a bracket or two? Or wait and take a larger amount at an even higher rate?

This is another reason Roth conversions can be valuable. By converting pre-tax dollars to Roth during lower-income years, you're not only managing your own future tax exposure, you're also moving money into an account your heirs can inherit tax-free.

Tax-Smart Charitable Giving in Retirement

I tell clients: friends don't let friends gift cash in retirement. If you're charitably inclined, there are approaches to giving that may be more tax-advantageous than writing a check. Two that may be worth considering:

• Gifting highly appreciated stock: If you hold shares with significant gains — think Nvidia, Amazon, Google, or any position that's grown substantially — you can gift those shares directly to a nonprofit. You avoid realizing the capital gains, and the full value of the shares goes to the organization.

• Qualified charitable distributions (QCDs): For those over age 70½, you can direct a distribution from your IRA straight to a qualified nonprofit. The amount counts toward your RMD but is not included in your taxable income. It supports the causes you care about while also reducing the balance in your pre-tax accounts, which in turn may reduce future RMDs and the tax exposure for your heirs. 

Putting It All Together: Planning by Life Stage

The right approach to retirement accounts depends on where you are in life, and the strategy that makes sense at 28 may not be the same one that makes sense at 58. Here's a general framework for how I think about retirement account planning at different stages.

Early career: This is the time to build the savings habit. Prioritize Roth contributions while your tax bracket is likely lower, and take full advantage of the employer match, contributing beyond it if your budget allows. Set automatic annual increases so your savings rate grows over time without disrupting your day-to-day spending. And make sure the money inside your accounts is actually invested, not sitting in cash.

Mid-career: As your income grows, the tax planning conversation becomes more relevant. Depending on your bracket, a shift toward pre-tax contributions may start to make sense. This is also the stage to explore strategies like backdoor Roth contributions and consolidate old 401(k) accounts so your retirement savings are organized and aligned.

Approaching retirement: Catch-up and super catch-up contributions can help you add to your savings in the final working years. Begin thinking carefully about your withdrawal strategy — the order in which you'll draw from different account types — and how your mix of pre-tax, Roth, and taxable accounts will interact with your income needs and tax situation.

In retirement: You're responsible for providing your own paycheck, and withdrawal strategy takes center stage. Roth conversions during lower-income years, before Social Security and RMDs begin, may help reduce your future tax exposure. Consider the legacy implications of your account mix and explore tax-smart charitable giving strategies that align with both your philanthropic goals and your broader financial plan.

An Advisor Can Help You Think Through Your Retirement Strategy

At its core, retirement account planning comes down to a few questions: What is your time horizon? What risks do you need to take, and what risks can you afford to take? And how do your tax brackets shape the decisions you make along the way?

The answers are different for everyone. That's why every person has their own unique risk profile, and why working with an advisor who can look at the full picture can make a meaningful difference.

At EP Wealth, our financial planning advisors work with clients at every stage of life to help them understand their retirement account options, become aware of common pitfalls, and build a strategy that fits their goals and circumstances. Whether you're just starting your career or approaching retirement, we're here to help you think it through.

DISCLOSURES:

• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
• EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
• Hiring a qualified advisor and/or financial planner does not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
• The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC will satisfy your specific financial services requirements. Services offered by other advisors may align more to your specific needs.
• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
• EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
• All investment strategies have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment strategy will be suitable or profitable for a client’s portfolio. The risk of loss can never be eliminated even if working with a professional.
• The information presented is hypothetical in nature and not reflective of a real client or scenario. There is no guarantee nor is the intention of this example to establish any sense of assurance, that, if followed, the strategies referenced here will produce a positive or desired outcome. In fact, there is no guarantee or warranty that any of the steps detailed will enable a positive outcome, successful or desired results. The intent of this hypothetical example is strictly for educational and illustrative purposes only.