Whether you’re just starting out in your career or if you’ve already been saving, it’s good to know about the popular retirement account options available to you.

You have saving and investment options

While there are several main ways to save, 401(k)s and IRAs are the two most popular. A 401(k) is a retirement plan usually offered through your employer, while an IRA is a retirement account that you set up and contribute to independently. Finally, you can always save money in a regular savings account, too – but that doesn’t have tax advantages so you won’t save up as much.


A 401(k) is a way to save for retirement that’s set up by your employer – and you typically cannot have a 401(k) account unless you have an employer that offers one. Most 401(k)s are managed by companies themselves or investment groups, and most 401(k)s invest in the stock market, at least with a portion of the assets. In a typical setup, you have your employer set aside a percentage of your gross wages (that is, your pay before taxes and other deductions), such as 8%. While there are no income limits for 401(k)s, there are contribution limits – meaning that you can only contribute up to a maximum dollar amount each year. Check your benefits department or tax advisor for details on the maximum.

In many cases (but not all) your employer will match some of your contributions to a 401(k) account. For example, a company may match you dollar-for-dollar up to a certain percent of your wages – for instance, up to 3%. In this scenario:

  • If you contributed 3% of $100 in wages to your 401(k), you would get a $6 deposit to your 401(k) – $3 from your wages and $3 from your company.
  • If you contributed 4%, you would get a total of $7 – $4 from your wages and $3 from your company.
  • If you contributed 2%, you would get a total of $4 – $2 from your wages and $2 from your company. In this last instance, you’re losing out on the $1 that your company would contribute because you’re choosing to contribute only 2% (and your company would have matched up to 3%).

Traditional IRAs

A Traditional IRA is a special savings account that you set up for retirement at a financial institution like Patelco or at an investment brokerage. You can choose a variety of investments for your Traditional IRA, including stocks, bonds, ETFs, share certificates and cash savings. Like all IRAs, Traditional IRAs are governed by specific regulations and tax laws, so it’s a bit different than a typical savings account. Patelco offers IRAs in several forms – you can talk to a CFS Financial Advisor* to learn more. There are no income limits for Traditional IRAs, meaning that you can contribute to them no matter what your annual gross income is.

After you set up your Traditional IRA, you can make contributions, up to $6,000 per year ($7,000 if you're age 50 or older). The cutoff date for contributions aligns with tax deadlines, so you have until tax day to make contributions for the previous year. When you make a contribution to a traditional IRA, the amount of your contribution may reduce your taxable income for the year – check with your investment advisor or tax advisor to see if you qualify. For example, if your income is $70,000 and you contribute $6,000 to a Traditional IRA, then your taxable income that year will drop to $64,000 assuming you qualify for the deduction.

You can contribute pre-tax or after-tax dollars, giving you immediate tax benefits if your contributions are tax-deductible. The contributions you make to a Traditional IRA account will then grow tax-deferred, meaning that you are only taxed on your earnings once you withdraw. You’ll pay ordinary income tax on these withdrawals. Note that early withdrawals may be taxed as income and also assessed a 10% penalty.

Roth IRAs

A Roth IRA is similar to a Traditional IRA, but with very different tax advantages. Only after-tax dollars may be contributed to a Roth IRA account. On the upside, once you withdraw from a Roth IRA during retirement, you can do so tax-free, as long as the funds have been held for at least 5 years. Whatever interest and capital gains you earn in a Roth IRA also grow tax-free. This means that if you earned $100 in interest and $1,000 in capital gains in a single year from money in your Roth IRA, you don’t have to pay taxes that year – nor will you have to pay additional taxes when you withdraw at retirement.

In 2022, the annual contribution limit for the Roth is the same as the Traditional IRA, $6,000 if you are under the age of 50. If you contribute to both a Roth IRA and a traditional IRA, the combined annual limit is $6,000. Note that there are also income limits for Roth IRAs, so be sure to talk to your financial advisor to see if you qualify.


A SEP IRA is a simplified employee pension IRA. It’s similar to a Traditional IRA in that contributions are tax-deductible, and investments grow tax-deferred until retirement. At the point of withdrawal, the money will be taxed as regular income. What’s different about a SEP IRA is that it’s best suited for freelancers, independent contractors or small business owners with few or no employees.

If you’re a small business owner with employees, this plan requires equal contributions as a percentage of compensation. For instance, if you contribute 15% of your compensation to your plan, you also have to contribute 15% to each of your employees’ plans. The contribution limits are much higher, up to $57,000 in 2020 (but it also can’t exceed 25% of your total compensation).

The bottom line difference between Traditional and Roth IRAs

The difference between a Traditional IRA and a Roth IRA essentially comes down to tax deductions – do you want tax advantages now or in the future? If you expect to be in the same or lower tax bracket in the future, you’re probably better off with a Traditional IRA that gives you tax advantages now. If you expect to be in a higher tax bracket by the time you retire, a Roth IRA may be the best option. If you’re a millennial who is decades away from retirement, you should probably be contributing to a Roth IRA.

If you’re part of Generation X, whether or not to fund a Roth IRA account is dependent on your income and other tax considerations, including whether you’re married. And if you’re nearing retirement, it probably doesn’t make sense to contribute to a Roth account versus a traditional pre-tax account unless you’re definitely going to be in a higher tax bracket once you retire.

Whatever stage of life you’re in, talk to a financial advisor to see which one is best for you – and as a Patelco member you have access to a complimentary consultation with a CFS Financial Advisor.

So should you get an IRA?

The benefits of opening an IRA account are that you control where your money is invested. A couple of items to consider before you open one are your overall financial goals and the tax implications. For more guidance on whether or not opening an IRA account is the best decision for you this year, set up a free session to speak with one of one our CFS Financial Advisors at your local Patelco branch.

* We want to remind you that non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.