401(k) vs IRA, Roth vs Traditional: 2026 Limits, the Full Employer Match, the Order to Fund Them, and Why Cashing Out at a Job Change Costs So Much (Money School, Lesson 13)

A 401(k) is a retirement account through your employer; an IRA is one you open yourself. Both let your investments grow without being taxed every year, and both come in two flavors: traditional, where you skip tax now and pay it when you withdraw, and Roth, where you pay tax now and withdraw tax-free later. For 2026 you can put up to $24,500 into a 401(k) and $7,500 into an IRA, more if you are 50 or older. The order that works for most people: first contribute enough to your 401(k) to get the full employer match, then fund an IRA, then go back and raise the 401(k). Check your match this week; it is the only guaranteed 50% or 100% return you will ever be offered. Here is the mistake that quietly costs more than any market crash: when people change jobs, between roughly a third and two fifths of them cash out their 401(k) instead of moving it. A $15,000 balance cashed out at 30 can shrink to about $10,200 after the 10% penalty and tax; left invested at 7% until 65, it would have grown to about $160,000. This is Lesson 13 of Money School.

Jake has been self-employed for eleven years, and for eleven years he has told himself that retirement accounts were "for people with HR departments." His only retirement savings were a 401(k) from his last job before the shop, $9,000 he had not looked at in years, sitting in a fund he had not chosen. When Ethan asked him what he planned to live on at 67, Jake said "the shop," and Ethan asked, gently, what happened if the shop's lease ended or his eyes went. Jake did not have an answer. He had a $9,000 account in a forgotten fund and a sense that the rest of the system was not built for people like him.

If you have a forgotten account somewhere, or no account at all, or one you joined at your first job and left alone since, you are entirely normal. In 2025, the median balance among people in workplace plans at the largest provider was $44,115, and that is among people who have a plan at all. Nobody taught me any of this either: I left my first job's 401(k) sitting in a high-fee default fund for five years because I thought moving it would cost money. It cost nothing to move, and the five years in that fund cost me more than any single mistake on this course. This lesson is the map I did not have.

Why retirement accounts matter: the tax shelter for compounding

In Lesson 11 you saw how compound interest turns small monthly amounts into large sums over decades, and in Lesson 12 how a low-cost index fund lets you keep most of that growth. Retirement accounts add the third piece: they stop the tax system from trimming the growth every year.

In an ordinary investment account, dividends are taxed in the year you receive them and gains are taxed when you sell. Over 30 years, that annual trim adds up. Inside a 401(k) or IRA, the money grows without being taxed year by year. You are taxed either once at the start (Roth) or once at the end (traditional), not every year along the way. On top of that, a workplace plan often comes with free money from your employer, the match, which no ordinary account offers.

The price is a promise: the money is meant to stay until retirement. Withdrawals before age 59 and a half usually add a 10% penalty on top of any tax, with a few exceptions this lesson covers. That restriction is a feature as much as a cost. It is the reason money in these accounts tends to survive long enough to compound.

401(k) vs IRA: the two accounts, side by side

The 2026 limits in one place, since they change every year:

They are not rivals. The 401(k) is better at volume and free money; the IRA is better at choice and low cost. Most people who can use both, do.

Jake: "So the 401(k) from my old job is still mine, even though I don't work there?"

Ethan: "Every cent you put in, and any match that vested. It's been sitting there for eleven years in whatever fund it landed in. The first job is to go and find it."

The employer match: the only guaranteed 50% to 100% return

Many employers add money to your 401(k) when you contribute. A common formula is "50% of what you put in, up to 6% of your pay," which means if you contribute 6%, they add 3%. Others match dollar for dollar up to 3% or 4%. Whatever the formula, the match is an immediate return of 50% or 100% on the matched dollars, before the market does anything. There is nothing else in personal finance that reliably pays that.

Here is what it is worth over a career. Someone earning $60,000 who contributes 6% with a 50% match on that 6%, invested for 35 years at 7%, ends up with about $810,000. The same person contributing 6% with no match ends up with about $540,000. The match alone is worth about $270,000, for doing nothing except contributing enough to collect it.

Three things to check about yours:

• The formula. What percentage do you have to contribute to get all of it? Contribute at least that much, even while paying off debt; Lesson 9's sequence puts the match before everything except a starter fund.
• Vesting. Your own contributions are always yours. The employer's match may "vest" over a few years, meaning you keep all of it only if you stay long enough. Check the schedule before you change jobs.
• Auto-enrollment. Many plans now enroll new employees automatically, often at a low starting rate. Being enrolled is good; being enrolled below the match is the default many people never change. Workers at the largest provider averaged 7.6% contributions in 2025, or 12.1% with the employer's share.

Roth vs traditional: pay the tax now or later

Both versions of both accounts grow untaxed. The only question is when you pay the income tax.

• Traditional: contributions reduce your taxable income this year; withdrawals in retirement are taxed as income. You save tax now.
• Roth: contributions come from income you have already paid tax on; qualified withdrawals in retirement, including all the growth, are tax-free. You save tax later. Roth IRAs and Roth 401(k) accounts also have no required withdrawals during your lifetime.

Which is better depends on one comparison: your tax rate today versus your tax rate when you withdraw. If you expect to be in a lower bracket in retirement, traditional usually wins; if you are early in your career, in a low bracket now and expecting higher income later, Roth usually wins. Nobody knows future tax rates, so if you cannot decide, splitting between the two is a perfectly sensible answer; it gives you a choice of which pot to draw from later.

A note on traditional IRAs: if you or your spouse are covered by a workplace plan, the tax deduction for a traditional IRA shrinks and then disappears at higher incomes, $81,000 to $91,000 for a single filer covered at work in 2026. Above those ranges, a Roth IRA (if you are under its own limits) is usually the more useful IRA.

The order: where your retirement dollars should go first

1. 401(k) up to the full employer match. Claim every matched dollar.
2. Clear high-interest debt. Lesson 9's rule: debt above roughly 8% to 10% usually comes before investing beyond the match.
3. An IRA, up to its limit. $7,500 in 2026. A Roth IRA if you qualify and the reasoning above points that way; it gives you full choice of low-cost index funds.
4. Back to the 401(k), up toward its limit. $24,500 in 2026. Choose the cheapest broad index fund or index-based target-date fund on the menu, as in Lesson 12.
5. A health savings account, if you have a high-deductible health plan (Lesson 8): it can work as an extra retirement account for medical costs.
6. An ordinary taxable brokerage account for anything beyond that, in the same broad index funds.

If your 401(k) menu is poor, with only high-fee funds, step 3 moves ahead of everything after the match: take the match, then use the IRA for its better choices, then come back to the plan.

How much in total? A common target is 15% of income including any match, but the honest answer comes in Lesson 14, from your own spending rather than a rule of thumb. If 15% is out of reach, start with the match and add one percentage point every time you get a raise, the split from Lesson 4.

Changing jobs: roll it over, leave it, or cash it out

When you leave a job, your 401(k) stays yours, and you have three choices:

1. Roll it into your new employer's plan, if the new plan accepts rollovers and has good, cheap funds. One account, one login.
2. Roll it into an IRA. Usually the most flexible choice: you pick the funds and the fees. Ask the old plan for a direct rollover, sent straight to the new account, so the money goes account to account.
3. Leave it where it is, if the old plan allows it and its funds are good. Fine, as long as you keep track of it.

The fourth choice, cashing out, is the costly one, and it is extremely common. Studies of people leaving jobs have found that somewhere between about 30% and 41% cash out their 401(k), most of them draining the whole account. Before 59 and a half, a cash-out is usually taxed as income and hit with a 10% penalty. On a $15,000 balance, for someone whose federal tax rate is 22%, that leaves about $10,200. Left invested at 7% for 35 years, the same $15,000 would have grown to about $160,000. The cash-out does not feel like losing $150,000; it feels like a windfall during a stressful move. That is exactly why it is so costly.

There are narrow exceptions to the penalty worth knowing, so that you only pay it on purpose, if ever: leaving an employer in or after the year you turn 55 lets you withdraw from that employer's plan without the 10% penalty (not from an IRA); one emergency withdrawal of up to $1,000 a year is allowed; and up to $5,000 per child for a birth or adoption. Tax still applies in each case. The emergency fund from Lesson 2 is what keeps you from needing any of them.

Jake: "When I left that job I nearly took the cash. I needed a van deposit."

Ethan: "And if you had, that $9,000 would have been about six thousand after tax and penalty. Instead it's still there, waiting to be moved somewhere cheap. Not taking it was the best financial decision you didn't know you made."

No workplace plan, or self-employed: your options

Not having an employer plan means you have to build the account yourself, not that you are left out. The options:

• An IRA, traditional or Roth, up to $7,500 in 2026. Anyone with earned income can open one.
• A SEP IRA, for the self-employed and small business owners: contributions are made as the employer, as a percentage of your self-employment income, with a much higher ceiling than an ordinary IRA.
• A solo 401(k), for the self-employed with no employees other than a spouse: you contribute both as the "employee," up to the same $24,500 limit as any 401(k), and as the "employer," a share of your profits.
• A SIMPLE IRA, which small employers can offer staff: up to $17,000 in 2026, plus $4,000 if 50 or older, with a required employer contribution.

Jake's choice, as a sole owner with one part-time employee, was the conversation the shop's accountant had been trying to start for years. For him, the first step was simpler: open an IRA, roll the old 401(k) into it, and start a monthly contribution.

When you can take the money out: the rules in plain English

• From age 59 and a half, you can withdraw from 401(k)s and IRAs without the 10% penalty. Traditional withdrawals are taxed as income; qualified Roth withdrawals are tax-free.
• Required minimum distributions from traditional accounts start at age 73: you must withdraw at least a set amount each year. Roth IRAs and Roth 401(k) accounts have no required withdrawals during your lifetime.
• Before 59 and a half, withdrawals generally carry the 10% penalty plus tax, apart from the exceptions above and a few others.

The United Kingdom and Australia: pensions, ISAs and super

Every country has its own version of the same idea: an account where retirement money grows with tax relief, often with employer money on top. In the United Kingdom, workplace pensions under automatic enrollment require at least 8% of qualifying earnings in total, with the employer paying at least 3% and the employee about 5% including tax relief. Contributing more to get extra employer matching, where your employer offers it, is the British version of "take the full match." Alongside it, the Stocks and Shares ISA lets 20,000 pounds a year grow free of tax for 2026/27; from April 2027 the cash ISA limit is due to fall to 12,000 pounds for under-65s, with the overall allowance unchanged.

In Australia, employers must pay superannuation guarantee contributions of 12% of ordinary earnings into your super fund, a rate with no further increase currently legislated. You can add more through salary sacrifice or personal concessional contributions, up to a cap of 32,500 Australian dollars in 2026-27, and people with a total super balance under 500,000 dollars can carry forward unused cap from up to five earlier years. The checks are the same as Lesson 12's: what your super is invested in, what it charges, and whether you have more than one account quietly charging fees twice.

Wherever your paycheck lands: take the employer's money, use the tax shelter, choose low-cost funds, and leave it alone until you need it.

This week's exercise: find every account and claim the match, do this with me

Forty minutes. I found a forgotten account the first time I did this; most people who have changed jobs a few times do.

1. List every job you have had where you might have joined a retirement plan. For each, find the account: old statements, the employer's benefits contact, or the plan provider's site.
2. For your current job, find the match formula and your current contribution rate. If you are below the match, raise it today; it takes two minutes in the benefits portal.
3. For every account, write down the fund it is in and the fund's expense ratio (Lesson 12). Move any money sitting in high-fee defaults to the plan's cheapest broad index option.
4. For old 401(k)s, decide: leave, roll into the new plan, or roll into an IRA. If rolling, ask for a direct rollover.
5. If you have no workplace plan, open an IRA and set up a monthly transfer on payday, even a small one.
6. Put a reminder in January to check the new year's limits and raise your contribution by one percentage point.

That is the whole exercise. One evening, and your retirement money stops being something that happens to you.

Honest aside: the system is confusing, and that is not your fault

The American retirement system is a patchwork: two kinds of accounts, two kinds of tax treatment, a dozen limits that change every year, different rules for employers of different sizes, and a penalty schedule with a list of exceptions. If it feels as if it was designed for people who already understand it, you are reading it correctly. That confusion has a real cost: it is part of why so many people leave matches unclaimed and cash out when they change jobs.

The good news is that you can skip most of it. You need four habits: take the full match, use low-cost index funds, keep the money invested when you change jobs, and raise your contribution with every raise. Everything else on this page is detail you can look up when you need it.

Where this fits in Money School, and what comes next

Lesson 13 is the third lesson of Stage 3, "Build the reservoir." Lesson 11 showed why time matters, Lesson 12 showed what to invest in, and this lesson showed where to hold it. Lesson 14 answers the question all three lead to: how much is enough? You will work out your own retirement number from your own spending, not a guru's, and see how the saving rate, not the salary, sets the date.

Then Lesson 15 runs the honest comparison of renting and buying a home, including the costs the "rent is throwing money away" line leaves out. The course page shows every lesson and which ones are live.

Retirement accounts: your questions, answered straight

Jake found his old 401(k) in an afternoon: $9,000 in a fund charging 0.89% a year, still sitting with the plan from his last job. He opened a Roth IRA, rolled the old account into an IRA with a direct rollover, moved the money into a broad index fund at a fraction of the old fee, and set up $300 a month on the first of each month. Then he booked the conversation with the shop's accountant about a solo 401(k) that he had postponed for three years. Ethan wrote the line below on the back of the rollover form.

Revision note. Written October 24, 2026, as Lesson 13 of Money School. The figures carry their dates in the text: the IRS limits for 2026, the IRS rules on early distributions and required minimum distributions, the 2026 edition of How America Saves, studies of cash-outs at job changes, and the U.K. and Australian thresholds for 2026-27; the growth figures are our own arithmetic at 7%. "A bird in the hand is worth two in the bush," says the old proverb; a 401(k) match is a bird in the hand that your employer is trying to give you.