Due to compound growth, the earlier you begin saving for retirement, the better prepared you’ll feel. But what is the best format to place these savings into? And how can you avoid excessive tax penalties? Tax planning is a tactical method of positioning your investments, income stream, and savings to avoid, defer, or reduce your tax liability.

When selecting the best tax-advantaged savings account, several factors need to be considered:

  • What are the different types of retirement savings accounts?
  • How do you contribute to the account?
  • What are their tax advantages or disadvantages?
  • How to take distributions out or transfer them to a different account?

While this article serves as a guideline, please consult with a manager of financial services to find the best after-tax rate of investment for your savings. In addition, take advantage of our retirement calculator library to get a better handle on your timeline and financial goals.

Traditional 401(k)

Traditional 401(k)s allow the taxpayer to defer their taxes until withdrawal, typically after age 60. If you decide to withdraw early, you are required to pay a 10% penalty fee. You are also required to start taking money out of your 401(k) – known as required minimum distributions – after you pass the age of 72 to ensure those deferred tax dollars enter the tax stream.

Pros: The higher contribution limits for 401(k)s in 2021 are $19,500 (pre 50 years of age) and $26,000 (post 50 years of age). A traditional 401(k) lowers your taxable income, as your contributions are made before taxes are taken from your paycheck.

Contributions are made in terms of a percent of salary, i.e. 5% or 10%, so when you get a raise at work, your contribution to your 401(k) automatically increases.

In addition, more and more companies now offer to match your pre-taxed contributions – i.e. employer matching – basically giving you free money to put towards your retirement savings. Some companies offer a 100% match, while others match a percentage of your contribution up to a limit of your salary.

Cons: Some employee plans have higher fees, which can deeply affect your tax rate at withdrawal if you have a high-income tax rate at or after age 60. Your money is also locked in the account until a specific age, typically 55; the only way to take it out early is through a 401(k) loan, but in doing so, you lose the power of compound growth.


If you leave your employer, you can rollover your 401(k) in a number of ways, each with their own tax rules. If you are rolling over a traditional 401(k) to a Roth format, you’ll have to pay taxes on the rollover amount. However, if you roll over a traditional 401(k) to a traditional IRA, you do not have to pay a tax penalty.

Several accounts like a Vanguard IRA or Fidelity IRA  allow you to create these rollovers.

If you’re simply moving from one 401(k) account with an employer to a new employer-sponsored 401(k), there are typically programs in place to allow you to transition the funds, and you may just need to ask your employer.

If you are a philanthropist, you can use a 403(b) – the nonprofit version of a traditional 401(k) account – which follows the same rules with the exception that you can contribute up to $19,500 annually.

Traditional IRA

Similar to a traditional 401(k), a traditional IRA reduces your taxable income and allows the taxpayer to defer their taxes until they make a withdrawal i.e. pre-tax contributions are made and are put off until later  —  perhaps when you’re in a lower tax bracket,  a major advantage for your tax planning strategy.

Again, if you withdraw early (prior to age 60), a 10% penalty fee is applied. Traditional IRAs also require yearly withdrawals to be made after age 72.

Pros: Investment into a Traditional IRA provides more investment options than a traditional 401(k), where your options are essentially limited to what you can invest in per your employer’s plan. It also allows you to consolidate all of your employer-provided plans, helping you build a more diverse portfolio.

Cons: The major difference between a Traditional 401(k) and a Traditional IRA, is that the contribution limits for a Traditional IRA are much lower, topping out at $6,000 per year prior to age 50 and $7,000 after the age of 50.

Roth 401(k)

Roth 401(k)s and Roth IRAs are both contributed to after-tax; that is, you receive a paycheck from your employer after taxes are withdrawn by the IRS, and then make deposits into the account. The growth from these deposits is also tax-free, so when you make a withdrawal, you are not taxed on your earnings.

Both Roth 401(k)s and Roth IRAs have similar guidelines to traditional IRAs and 401(k)s when it comes to distributions; you cannot withdraw prior to age 60 without incurring penalty fees and mandatory yearly distributions are required after age 72.

Similar to a traditional 401(k), Roth 401(k) contributions limits are $19,500 per year prior to age 50 and $26,000 after the age of 50.

Roth IRA

Even the best Roth IRA accounts limit contributions to $6,000 annually until the age of 50, after which the contribution maximum is $7,000 annually.

Pros: A key difference between the Roth 401(k) and a Roth IRA, is that with a Roth IRA you can make withdrawals any time without the penalty fee, as only the earnings are penalized. With a Roth 401(k), you must have your contributions in the account for a five-year minimum period.

Cons: One major con with a Roth IRA, however, is it locks out high-income earners. That is, if you are a single earner making more than $139,000 annually, or a married couple making more than a combined $206,000 per year, you cannot contribute to this type of account.

There are ways around this limitation, such as a Backdoor Roth IRA Contribution, which allows high-income earners to achieve tax-free growth in their retirement plan. Several steps are required, including depositing an initial (typically pre-taxed) amount into a traditional IRA and then converting that deposit into a Roth IRA.

Since a Roth IRA conversion doesn’t require additional taxes, and the deposit essentially exists tax-free from that point on, this is an ideal format to invest from, such as into a mutual fund, EFT, or other high growth investment. Of course, this depends on your risk tolerance and the timeline of your financial goals.

Investing on your own can be complex and emotional, but a wealth strategy manager or certified financial advisor can expertly guide you through the process. That way, you are hitting your retirement savings goals and sleeping well at night.


While similar in many ways to a traditional IRA, a SEP IRA can be set up by self-employed individuals or people who own their own businesses. You can contribute much more to a SEP IRA, up to $57,000 annually or 25% of your yearly income.

Since retirement planning typically spans decades of time, it’s wise to build a successful plan that maximizes growth and tax efficiency.

Strengthen your financial wealth security and consider using Snowpine Wealth to understand the format with the best tax advantages for you and your unique financial profile.

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