401(k) vs IRA — how to save for retirement in the USA

Introduction / Who is it for

The retirement system in the USA is based on three pillars: Social Security (government, low), employee accounts (401(k)), and private accounts (IRA). Social Security typically covers about 40% of pre-retirement earnings — the rest must come from savings. The Polish community in the USA often does not take advantage of the 401(k) match — this is leaving money on the table.

401(k) — employee account

• Offered by the employer — most companies with more than 50 employees
• Contributions from salary before tax (Traditional) or after (Roth 401k)
• Annual limit for 2026: $23,000 (employee) + $7,500 catch-up for 50+
• Employer match — usually 3-6% of salary (FREE money!)
• Choice of funds limited to employer's offerings (usually 10-30 funds)
• Payouts without penalty after age 59½; before that, a 10% penalty + tax

Traditional IRA

• Opened privately with a broker (Fidelity, Vanguard, Schwab)
• Deductible contributions from taxes (usually)
• Annual limit for 2026: $7,000 + $1,000 catch-up for 50+
• Unlimited choice of funds — index funds, ETFs, stocks
• Tax on withdrawal like ordinary income
• RMD (Required Minimum Distributions) starting at age 73

Roth IRA

• Contributions AFTER tax — no deduction in the year of contribution
• Growth and withdrawals TAX-FREE after age 59½
• Annual limit: $7,000 + $1,000 catch-up
• Income limits (2026):
  • Single: full contributions up to $150,000 MAGI; partial 150-165,000; above — none
  • Married: full up to $236,000; partial 236-246,000
• No RMD (you can hold until death)
• Contributions (not gains) can be withdrawn penalty-free at any time

What to choose — strategy

Step 1: 401(k) up to the match

If your employer offers a match (e.g., 100% up to 3% of salary, or 50% up to 6%) — contribute at least enough to get the full match. That’s free money.

Step 2: Roth IRA if you qualify

After fulfilling the match, switch to a Roth IRA up to the limit ($7,000/year). Beneficial for most people aged 20-50 with income below $150k. Roth = tax-free growth for decades.

Step 3: Maximize 401(k)

After utilizing the Roth IRA, return to the 401(k) and increase your contribution to $23,000 per year. Choose Traditional if you are currently in a high bracket, Roth 401k if in a low bracket.

Step 4: HSA (if you have HDHP)

Health Savings Account with a high deductible health plan is a "triple tax advantage": deductible contributions, tax-free growth, tax-free withdrawals for medical expenses. Limit for 2026: $4,300 single / $8,550 family.

Step 5: Taxable brokerage account

After exhausting all tax-advantaged accounts — a regular investment account (taxable brokerage).

Backdoor Roth (for high earners)

If you earn above the Roth IRA limit, you can contribute to a Traditional IRA non-deductible, and then convert to Roth (Roth conversion). There is no income limit for conversions. This strategy is legal but requires attention to the pro-rata rule.

What happens when returning to Poland

• The 401(k) and IRA accounts remain — you do not have to withdraw
• Tax on withdrawal: federal + state fees plus, in Poland — may be taxed again (double taxation agreement from 1974, amended)
• Consultation with a CPA and Polish tax advisor before withdrawal
• Tax-free Roth withdrawals: in the USA without tax; in Poland — situation unclear, check the current interpretation

Common mistakes

• Not utilizing the 401(k) match — you miss out on 3-6% of your salary annually
• Lack of retirement savings in the first 10 years of work (loss of compound interest power)
• Keeping 401(k) in cash instead of funds (most plans default to 100% in stable value/money market — check!)
• Selling 401(k) when changing jobs (10% penalty + tax). Better: rollover to IRA
• Underestimating HSA — the best tax account in the USA for everything

Rollover when changing jobs

1. When leaving an employer, you can leave or transfer your 401(k)
2. Rollover to IRA is often the best option — broader choice of funds, lower fees
3. Call your broker (Fidelity, Vanguard) — free assistance in the process
4. Direct rollover (trustee-to-trustee) — no penalties or taxes
5. DO NOT take a payout to your own account and wait 60 days — risky (if you miss the deadline: 10% penalty + tax)

What to do TODAY

1. Check if you have a 401(k) with your employer (HR will provide information)
2. Check the amount of the match — contribute at least to the maximum
3. Open a Roth IRA with Fidelity/Vanguard/Schwab (15 minutes online)
4. Set up automatic monthly contributions (set-and-forget)
5. Choose a target-date fund or an 80/20 portfolio (stocks/bonds) if you don’t know what to choose