401(k), IRA, Roth: the 2026 decision framework

The IRS publishes annual contribution limits indexed to inflation. For 2026 (verify against IRS Notice 2025-67 or the most recent annual notice before relying on these):

401(k) elective deferral. $24,000 base, $32,000 with the age-50 catch-up. SECURE 2.0 introduced a higher catch-up ($11,250) for ages 60-63 starting in 2025, the "super catch-up". Confirm with your plan administrator whether your plan has adopted this provision.

Total 401(k) contributions (your deferral + employer + after-tax). $70,000 for under-50, plus catch-up. This is the cap that gates the mega backdoor Roth, if you have an employer adding $15,000 in match and profit-sharing, your remaining capacity for after-tax contributions is $70,000 - $24,000 - $15,000 = $31,000.

IRA (traditional or Roth, combined across both). $7,500 base, $8,500 with age-50 catch-up.

HSA. $4,400 self-only coverage, $8,800 family coverage, plus $1,000 catch-up at age 55. HSA is technically a health account but functions as an additional retirement vehicle if used for qualified medical expenses or held until age 65 (when withdrawals for any purpose are taxed at ordinary rates, like a traditional IRA, but qualified medical expenses remain tax-free forever).

SEP-IRA / Solo 401(k) for self-employed: 25% of net self-employment income, capped at $70,000.

Roth IRA has income phase-outs. For 2026, joint filers above approximately $246,000 MAGI cannot contribute to Roth IRA directly (the backdoor Roth is the workaround). Single filers phase out around $156,000. These numbers move slightly each year — confirm with the IRS announcement.

Step 1. Capture the full employer match. If your employer matches 50% of contributions up to 6% of salary, you contribute 6% to capture the 3% free money. The match is a 50% guaranteed return on the matched portion, there is no other investment vehicle in personal finance with that risk-adjusted return. Skipping the match to put money in a Roth IRA instead is leaving free money on the table.

Step 2. Max the HSA if you have an HDHP. Contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. Triple tax advantage. Pay current medical expenses out of pocket and let the HSA compound for retirement. At age 65 it functions like a traditional IRA for non-medical withdrawals (taxed but no penalty).

Step 3. Max the IRA. Traditional or Roth depending on the bracket arbitrage (see next section). $7,500 base limit goes into one or the other (or split). For high earners above the Roth income limit, do the backdoor Roth, contribute to a non-deductible traditional IRA, then immediately convert to Roth. Pro-rata rule applies if you have other pre-tax IRA balances; this is the gotcha that catches most first-timers.

Step 4. Max the 401(k). Contribute up to $24,000 of elective deferral, traditional or Roth, again driven by the bracket arbitrage. The full match is already captured at Step 1; this step is the rest of the elective deferral.

Step 5. Mega backdoor Roth, if available. Some 401(k) plans allow after-tax (non-Roth) contributions plus in-plan Roth conversions or in-service distributions to a Roth IRA. This converts the post-Step-4 capacity (typically $30,000-40,000) into Roth-treated dollars. Plan-level feature; check with HR. If your plan supports this, it is the highest-leverage move available to high earners.

Step 6. Taxable brokerage. After all tax-advantaged space is filled, additional savings go into a regular taxable account. Index funds are tax-efficient (low turnover, qualified dividends). Bonds and high-turnover funds are better held in tax-advantaged accounts when possible.

Traditional contributions reduce current taxable income, then withdrawals in retirement are taxed as ordinary income. Roth contributions are made with after-tax money, then withdrawals (after age 59.5 and 5 years from first contribution) are tax-free.

The decision is a bet on whether your retirement bracket will be higher or lower than your current bracket. If lower (most common for typical workers), traditional wins, pay tax later at the lower rate. If higher (high earners early in career planning to maintain income, or expecting future tax rate increases), Roth wins, pay tax now at the lower rate.

For someone with $80,000 household income today (22% bracket) saving for a retirement at $60,000 in spending (12% bracket), traditional is a 10-percentage-point win. For someone at $300,000 today (35% bracket including state) planning to keep that income in retirement via portfolio income (35% bracket), Roth wins by avoiding the future tax on a much larger compounded balance.

The math of bracket arbitrage gets nuanced because retirement income is taxed in slabs, not at a marginal rate. A portion of retirement withdrawal sits in the 0% bracket (standard deduction), then the 10%, 12%, etc. The effective rate on traditional withdrawals is usually lower than the marginal rate. This nudges the equilibrium slightly toward traditional even at the same nominal bracket.

A practical default for typical middle-class earners: split. Half traditional, half Roth. Hedges the bracket forecast and maintains future flexibility (Roth Conversions in low-income years can move dollars from traditional to Roth without ever paying high marginal rates).

Roth IRA contributions are accessible. You can withdraw the contributions (not earnings) from a Roth IRA at any time, tax-free and penalty-free, without affecting the account's continued growth. This makes Roth IRA the best emergency-fund-of-last-resort layer — you can pull contributions for a real emergency without unwinding your retirement plan.

Traditional IRA conversions to Roth are taxable now, tax-free later. Useful in low-income years (early retirement, sabbatical, gap year) to fill up low brackets. The Roth Conversion Ladder is a key tool for early retirees: convert traditional dollars during low-income years, wait 5 years, withdraw the converted amount tax-free.

Required Minimum Distributions (RMDs). SECURE 2.0 raised the start age to 73 for traditional accounts and eliminated RMDs entirely for Roth 401(k)s starting in 2024 (Roth IRA never had them). This makes Roth a stronger choice for people who do not need to draw on retirement assets, they can pass to heirs without forced distributions.

Loans from 401(k). Most plans allow loans up to the lesser of $50,000 or 50% of vested balance, paid back over 5 years (longer for primary residence purchase). Interest goes back to your own account. Dangerous if you leave the employer, the loan often becomes due in 90 days, with the unpaid balance treated as a withdrawal (taxable + 10% penalty if under 59.5).

SEPP / Rule 72(t). Substantially Equal Periodic Payments allow penalty-free withdrawal from traditional IRA before 59.5, calculated as a fixed annuity-style stream. Once started, must continue for 5 years or until 59.5 (whichever is later). Useful for early retirees with traditional balances and limited Roth access.

The mega backdoor Roth exploits two features of certain 401(k) plans together: (1) after-tax non-Roth contributions allowed beyond the elective deferral limit, up to the $70,000 total cap; (2) in-plan Roth conversions OR in-service distributions to a Roth IRA. If both are present, you can stuff substantial dollars into Roth space per year on top of the regular limits.

Worked example. You earn $200,000, max your 401(k) at $24,000 (Roth or traditional), and your employer adds $12,000. Total is $36,000 of the $70,000 cap. The remaining $34,000 of capacity can go in as after-tax non-Roth contributions. Then immediately convert that $34,000 to Roth (in-plan) or roll it to a Roth IRA (in-service). Net result: $34,000/year of Roth contributions on top of the regular limits, year after year, compounding tax-free.

Not all plans support this. Smaller employers and older plans usually don't. Larger tech-company plans and some government plans (Federal TSP supports something similar via Roth TSP after-tax) do. Ask HR for the Summary Plan Description and look for 'after-tax non-Roth contributions' and 'in-plan Roth conversion' or 'in-service distribution' provisions.

Caveats. The IRS has rules around 'plan testing' that can reduce the effective limit if your plan fails certain non-discrimination tests, high earners can have their after-tax contributions returned at year end. Also, the conversion is taxable on any earnings that accumulated between contribution and conversion, so the ideal pattern is contribute and convert in the same pay cycle to keep earnings near zero. Practical detail that matters.

Skipping the match. Always Step 1. Contributing 0% to a 401(k) when the employer matches 50% up to 6% is leaving 3% of salary on the table. On a $80,000 salary, that is $2,400/year of free money walked past.

Backdoor Roth without checking the pro-rata rule. If you have any pre-tax money in a traditional IRA (including from old 401(k) rollovers), the backdoor conversion is taxed pro-rata across all your IRA balances. Do an old-401(k)-rollover into your current 401(k) (most plans accept) before doing the backdoor to avoid the issue.

Roth-only at all costs. Some financial-influencer dogma says always Roth. Wrong for most middle-income workers. If you are in the 22% bracket today and will retire in the 12% bracket, traditional is $10,000 better per $100,000 contributed.

Liquidating the 401(k) when changing jobs. Cashing out triggers ordinary income tax + 10% early withdrawal penalty. Even modest 401(k) balances roll over for free into the new employer's plan or into an IRA. The default of 'just take the cash' costs many people their entire retirement runway.

Not understanding the 5-year rule on Roth. Roth IRA earnings withdrawals are tax-free only if (a) you are 59.5+ AND (b) it has been 5 years since your first Roth contribution to ANY Roth IRA. Convert at age 58 and try to withdraw at 59.5, earnings are taxable. Plan around the 5-year clock if you start late.

Ignoring HSAs. Best vehicle in the lineup if eligible (HDHP coverage). Triple tax advantage. The default of 'use HSA for current expenses' wastes the long-term compounding. Pay medical out of pocket, save the receipts, let HSA grow, reimburse yourself decades later (the IRS does not require expenses to be reimbursed in the year incurred — only that you have records).

Step 1: Contribute to 401(k) up to the full match ($X depending on plan).

Step 2: Max HSA if HDHP-eligible ($4,400 single, $8,800 family).

Step 3: Max IRA ($7,500. Roth direct if income allows, backdoor Roth if not).

Step 4: Max 401(k) elective deferral ($24,000 total), traditional, Roth, or split.

Step 5: If plan supports, mega backdoor Roth up to the $70,000 total cap.

Step 6: Taxable brokerage with index funds for additional savings.

The Roth/traditional split within Steps 3 and 4 is the bracket arbitrage decision. For most people in the 22-24% federal bracket: lean traditional, with some Roth for flexibility. For people in the 32%+ bracket: lean Roth (less likely to be in a lower bracket in retirement). For early-career high earners with strong income trajectory: lean Roth (locking in current rates against future increases).

Run all this through our retirement calculator with your numbers and a 30-year horizon. The output shows the tax-adjusted nest egg at retirement, year-by-year contribution path, and where the money sits across accounts. Adjust contributions and revisit annually as bracket and income change.