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Should I Contribute To Retirement Accounts? Which One Is Best In 2026?

⛱️ Should you contribute to retirement?

In most cases, the answer is yes. Here are the exceptions…

  • You have no money in savings – The IRS assesses penalties for withdrawing money early, which more than wipes out benefits. We see this multiple times a year.

  • You have high interest debt, especially credit cards. The monthly payments on these, even if small is at higher interest than you earn. Pay these off first.

As long as the above is handled, retirement accounts are the easiest way to get ahead:

  • Company retirement accounts often offer a match, say $5,000. That is 100% ROI on the money you contribute, and it grows tax free.

  • Any ‘Pre Tax’ accounts reduce the taxable income in your highest tax bracket. Many clients will contribute when they are in a high tax bracket, and then take out funds when they are in a lower tax bracket.

  • Any ‘After Tax’ accounts grow tax free until retirement. When you take out the money, it is not subjected to any type of income tax.

IMPORTANT PRO TIP: Money in your retirement accounts is not subject to Long Term Capital Gains tax savings. When you take the money out, it is taxed at your normal income tax rate.

🎁 Pre tax VS. after tax accounts

This is a subject that is a bit of a personal choice. The numbers can be harder to break down for longer term planning, but here is what you need to know…

Pre-Tax Account – This money is contributed to your retirement account before taxation and is thus removed from taxable income in the year you contribute. If you are in a 32% Tax Bracket, you will save $3,200 in taxes for every $10,000 you contribute. When you retire and take the money out, you then pay taxes at your normal income tax rate. If your tax bracket comes down to 22% since you are not working, you effectively side step taxation on about 10% of contributions(not factoring in growth of value while invested)

After Tax Account – In this case, you pay taxes on the money in the year funds are contributed and your taxable income is not reduced. However, contributions grow tax free and come out in retirement with no taxes.

My general advice here is that when your tax bracket is lower, use after tax accounts as the tax savings is lower in the year contributed, but much larger when you retire. As your tax bracket gets higher, pre tax accounts offer a lot more savings each year. 32% and above, the tax savings become large.

However, a lot of this is personal decision and having a good financial planner to walk through this is great.

🎯 Traditional IRA

A basic ‘pre-tax’ account, contributions are tax deductible in the year they are made:

  • Tax Treatment: Contributions may be tax-deductible (subject to income limits if you’re covered by a workplace plan); earnings grow tax-deferred.

  • Contribution Limits (2026): $7,500 ($8,600 if age 50+).

  • Withdrawal Rules:

    • Required Minimum Distributions (RMDs) start at age 73.

    • Withdrawals are taxed as ordinary income.

    • 10% penalty for withdrawals before age 59½, with exceptions.

  • Benefits:

    • Tax deductions reduce taxable income.

    • Investment growth is tax-deferred.

  • Best For: Individuals expecting to be in a lower tax bracket in retirement.

👊 Roth IRA

A basic ‘after-tax’ account, contributions are not tax deductible in the year they are made. Distributions in retirement are not taxable, including any earnings made over the life of the IRA.

  • Tax Treatment: Contributions are not tax-deductible; earnings and qualified withdrawals are tax-free.

  • Contribution Limits (2026): $7,500 ($8,600 if age 50+), with income limits ($153,000 phase-out for single; $242,000 for married filing jointly)

  • Withdrawal Rules:

    • No RMDs during the owner’s lifetime.

    • Contributions can be withdrawn at any time without penalty; earnings can be withdrawn tax-free after age 59½ and a 5-year holding period.

  • Benefits:

    • Tax-free income in retirement.

    • No RMDs, allowing for wealth transfer.

  • Best For: Individuals expecting currently in a lower tax bracket and expecting to be in a higher tax bracket in retirement or those seeking tax diversification.

📍 401(K) / 403(b) / 457(b)

These are the most common types of employer accounts and there are a lot of advantages…

  • Much higher contribution limits

  • Often companies will match a portion of your contributions.

401(k) – Workplace account is for private sector employees

403(b) – Account for employees of non profits and schools

457(c) – Built for government employees.

Other than the name, these accounts are generally the same.

  • Tax Treatment: Contributions can be pre-tax (Traditional) or after-tax (Roth). Many companies offer a split of both. Contact your HR department and ask.

  • Contribution Limits (2026): $24,500 ($32,500 if age 50+).

  • Best For: Employees with access to employer-sponsored plans, especially with a match.

🍳 SIMPLE IRA

Savings Incentive Match Plan for Employees. Sometimes used by single member businesses.

  • Tax Treatment: Contributions are pre-tax; earnings grow tax-deferred.

  • Contribution Limits (2026): $17,000 ($21,000 if age 50+).

  • Withdrawal Rules:

    • Penalty of 25% for withdrawals within the first 2 years of participation.

  • Benefits:

    • Employer matches or contributions required.

    • Simple to administer.

  • Best For: Small businesses with 100 or fewer employees.

🚴‍♂️ SEP IRA

A simple option for Sole Proprietors, Single Member LLC’s, and even smaller S-Corps.

  • Tax Treatment: Contributions are tax-deductible; earnings grow tax-deferred.

  • Contribution Limits (2026): These can be a little tricky.

    For Sole Proprietors – You are allowed to contribute 20% of your total net earnings, but you have to consider Self Employment tax first.

    For S-Corps or Single Member LLCs with payroll – You can contribute up to 25% of your annual salary compensation.

  • Maximum contribution limit is $72,000.

  • Benefits:

    • High contribution limits for self-employed individuals or small business owners.

    • Simple setup and administration.

  • Best For: Self-employed individuals or small business owners with no or few employees.

🎤 Solo 401(K)

The Solo 401(K) is great because it allows large contributions as both an employer and an employee.

As an employee of my S-Corp, I can contribute up to $24,500 as an employee.

As an Employer of myself, I get to contribute an additional 25% of my salary compensation as a business expense.

  • Tax Treatment: Contributions can be pre-tax (Traditional) or after-tax (Roth).

  • Contribution Limits (2026):

    • Employee: $24,500 ($32,500 if age 50+).

    • Employer: Up to 25% of compensation, combined max $72,000 ($80,000 with catch-up).

  • Best For: Self-employed individuals or business owners with no employees other than a spouse.

🆕 New for 2026 – Catch-Up Changes

A couple of newer rules are worth knowing if you are 50 or older and trying to contribute as much as possible:

  • Super Catch-Up (ages 60–63): If you are between 60 and 63, you can make a larger catch-up contribution to your workplace plan – up to $11,250 instead of the standard $8,000. That brings your total possible 401(k) contribution to $35,750 for the year.
  • Roth Catch-Up for High Earners: If you earned more than $145,000 in wages from your employer the year before, your catch-up contributions now have to go into a Roth (after-tax) account instead of a pre-tax one. You still get to make the contribution – it just goes in after tax.

These changes come from the SECURE 2.0 Act and mostly apply to employer plans like the 401(k), 403(b), and 457(b).

‼️ Important Considerations

Having multiple accounts gets complicated

  • Retirement accounts have a total contribution limit each year. If you have a workplace retirement account, it can limit your ability to contribute to other accounts.
  • If you over contribute, you pay penalties until those contributions are taken out.

PRO TIP –

  • You have until April 15th of the following year to contribute.
  • Put the money you want to contribute aside in a High Yield Savings Account – I use WEALTHFRONT, but there are a lot of options.
  • Complete your tax return first, then have your accountant calculate how much you have to make additional contributions.

How to Choose the Right Account

  1. Employer Availability: Max out workplace plans with employer matches first (e.g., 401(k)).

  2. Tax Diversification: Combine pre-tax (Traditional) and after-tax (Roth) accounts to hedge against future tax changes.

  3. Self-Employment: Consider SEP IRA or Solo 401(k) for high contribution potential.

  4. Income Limits: Use Roth IRA if your income qualifies, or a Traditional IRA otherwise.

💪 Additional Hacks

Backdoor ROTH

For higher earners, The IRS allows you to contribute to a Traditional IRA and roll it over into a ROTH IRA. Although I am not a huge fan of this, as the contribution limits are low, it is a great way to slowly build a tax free retirement account.

Self Directed IRA’s

I love these. They are not usually available with traditional workplaces, but if you own your own business, they can be great. They allow you to invest your retirement accounts into assets outside of index funds or stocks.

I have had my retirement accounts invested in Hard Money Real Estate funds for about 8 years getting 9% annual. I could maybe get more in stocks, but 9% without any work is a great return.

The only downside of these is there is a lot of paperwork for set and for each additional investment.

🤔 Parting Thoughts

As always, thanks so much for reading! If you enjoy reading, please share these articles with anyone (subscribe here) that you feel might benefit.

If you have any additional questions, please reach out. We help individuals and businesses year-round with personal and business tax services.

Thanks,

– Taxman

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