Are you looking to optimize your retirement savings options now to maximize your income later on? It’s easier said than done. Different types of retirement accounts impose different contribution limits. There are also differing tax consequences with different kinds of accounts. Some of them postpone taxation of this money until it’s withdrawn, while others allow money to be accessed tax-free in retirement but offer no tax break right now.

As for me and my situation, though — and I suspect a bunch of other people’s as well — I’m a huge fan of the ordinary 401(k) that you’re most likely offered at your place of work. Here’s why.

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Two key retirement account types

There are several different kinds of retirement savings accounts. There are only a couple of major types of these accounts, however.

One differentiator is how and where these accounts are made available.

Most workplace retirement accounts will be the aforementioned 401(k) plans, funded by automated deductions from your paycheck. The other option is a self-managed and fully self-funded IRA (individual retirement account), typically held at a brokerage firm like Fidelity or Charles Schwab. And yes, you can simultaneously put money into both kinds of accounts, although each type has its own contribution limits.

The other key differentiator is when you’ll pay taxes on money put into a retirement account.

Although any growth and income generated by investments held in any retirement account won’t be taxable as long as it remains in the account, you’re not actually sidestepping taxes. With ordinary IRAs and 401(k) accounts, your contributions are tax-deductible for the year in which they’re made, but your eventual withdrawals from these accounts are taxed like ordinary income. Conversely, Roth IRAs and Roth 401(k) accounts don’t reduce your taxable income as money’s being put into them, but your withdrawals from them aren’t taxed when they’re removed. And once again, yes, you can simultaneously fund both kinds of retirement accounts, as long as you adhere to the stricter Roth IRA contribution rules.

So why do I prefer an ordinary (tax-deductible) 401(k) account as my primary retirement savings vehicle? There are a couple of key reasons, both of which are likely to apply to most other individuals.

Here’s why an ordinary 401(k) account works best for me

For the sake of disclosure, I’m technically self-employed; that means I’m the employee as well as the employer. That’s why I’m using what’s called a solo 401(k) as my chief means of saving for retirement within a tax-shielded account. Solo 401(k) accounts essentially work the same as most corporate-sponsored 401(k) plans do, though, so my thinking will likely make sense for most company employees as well.

That said, my top reason for prioritizing the use of an ordinary 401(k) account rather than a traditional IRA is simply the higher contribution limits offered with a 401(k) plan.

The most that anyone is allowed to contribute to a traditional IRA this year is 100% of their earned income up to a limit of $7,000, or $8,000 for anyone aged 50 or older. This year’s cap on 401(k) contributions, however, is a much higher $23,500 of your salary, plus an additional $7,500 for the 50-and-up crowd (though some people between the ages of 60 and 63 are allowed to add an extra $11,250 this year).

And that’s just the employee’s contribution. Your employer is allowed to chip in even more on your behalf.

Granted, most don’t. As Fidelity noted in its recently published look at all of the 401(k) plans it administers, the average worker contributed a more modest $8,800 of their own money into a 401(k) account in 2024, while their employers added an additional $4,770 on their behalf, for a total contribution of $13,570.

Still, that’s a healthy amount, one-third of which is won just for tucking away some of your own money for retirement. And a few lucky employees of very generous companies may see combined employee-employer contributions of up to $70,000.

But why an ordinary 401(k) as opposed to a Roth 401(k)?

The Roth is a tempting alternative, if only because nobody knows what income tax rates will be in the future. They could be higher.

I’m betting they won’t be too terribly different then compared to where they are right now, however. And given my expectation that my taxable income is greater now than it will be once I retire, these tax-deductible contributions do me more good now than they likely will then.

That won’t necessarily be the case for you, though.

See, I’m also at a stage of life where I have no tax-dependent-aged children, but I don’t yet qualify for any senior-specific discounts and tax breaks. I’m also probably in the midst of my highest-earning years. If you can’t say the same, you might want to pull out a pencil and some paper and do a bit of comparative number-crunching. You could be better off opting for the tax-free withdrawals that only Roth retirement accounts can offer.

Just give it some numbers-minded thought

Only you know every single detail of your financial situation. You may have a perfectly valid reason for choosing a different strategy under seemingly similar circumstances.

I do have a feeling my situation is more like most people’s around my age than not. At the very least, it’s worth a best-guess projection of your likely retirement income: Figure out when your tax liability is going to be at its greatest, and then reduce your taxable income at that point as much as you can.

Either way, ensuring you’re maxing out your employer’s matching contribution to your 401(k) in the meantime is of course a no-brainer, whether it’s a Roth account or not.

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Charles Schwab is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: short March 2025 $80 calls on Charles Schwab. The Motley Fool has a disclosure policy.