- 401(k) vs IRA vs HSA: Employer Match and Retirement Accounts (you are here)
- 401(k) Employer Match: Why Employers Offer It
Your job pays you in more ways than your salary. If your employer matches your retirement contributions, that match is free money, so contribute at least enough to collect all of it. Once costly debt is gone and your emergency fund is full, put money into a health savings account if your plan allows one. After that, choose between traditional and Roth accounts by comparing the tax rate you save now with the rate you expect to pay later. Count benefits as pay, because a lower salary can be the better offer.
Why it matters: Comparing job offers on salary alone can make you pick the worse one.
Summary: Contribute at least enough to collect the full employer match; once high-interest debt is cleared and the emergency fund is full (1.8: The Financial Order of Operations: Where the Next Dollar Should Go), fund an HSA through payroll if your health plan qualifies; then choose traditional or Roth for further dollars by comparing the rate a contribution saves today with the rate you expect to pay on withdrawal. Count benefits as pay: the match and the employer’s health-premium share can make a lower salary the better offer.
- For 2026: $24,500 into a 401(k) or 403(b), $7,500 into an IRA, and $4,400 self-only or $8,750 family into an HSA.
- The $24,500 is per person across every 401(k) and 403(b) in a year; a governmental 457(b) has its own limit.
- Matches exist partly to help plans pass tax tests, and the formula, not the headline percentage, sets the rate you need.
- HSA money contributed through payroll also skips the 7.65% FICA tax, which no 401(k) deferral does.
Throughout this volume we follow a single filer earning $75,000 who contributes 6% to a 401(k) with a 50%-up-to-6% match.
A job pays total compensation: salary plus what the employer spends on you outside the paycheck. Several benefits escape income tax, so a dollar of benefit can beat a dollar of salary:
| Benefit | What It Is Worth | The Catch |
|---|---|---|
| 401(k) match (6.2–6.5) | Commonly 50% of contributions up to 6% of pay — 3% of salary | Only if you contribute enough; may vest over up to six years (6.7: Vesting, Rollovers, and What Happens When You Change Jobs) |
| Health plan (8.2) | The employer’s premium share — $7,885 a year for single coverage on 2025 averages — tax-free | Fixed for a year once chosen |
| HSA / FSA (6.6) | Pre-tax money for medical costs; some employers add an HSA deposit | FSA money beyond any carryover is forfeited |
| Group life and disability (8.3, 8.4) | Life coverage often one times salary; long-term disability often 60% of pay | Employer-paid life coverage above $50,000 is taxable; both usually end with the job |
| ESPP | Company stock at up to a 15% discount | Ties savings to your employer |
| RSUs | Shares that become yours as they vest | Taxed as wages at vesting; unvested units lost if you leave |
| Paid time off | Each paid day is a day’s salary: $75,000 ÷ 260 = $288.46 | Payout of unused days depends on policy and state |
| Tuition and student-loan help | Up to $5,250 a year, tax-free | May require staying a set time |
| Commuter benefits | Up to $340 a month each for transit and parking, pre-tax | Only for actual commuting costs |
| Employee assistance program (EAP) | Free, confidential short-term counseling and referrals | Usually a few sessions per issue |
ESPPs. An employee stock purchase plan under Section 423 sells you shares through payroll at no less than 85% of market value; with a lookback, at 85% of the lower of the price when the offering period starts or on the purchase date. The 15% discount alone is an immediate 15 ÷ 85 = 17.6% gain. At $40 when the offering starts and $50 at purchase, $6,000 buys at 85% × $40 = $34: 176.47 shares worth $8,823.53, a 47% gain. Purchases are capped at $25,000 of stock a year, valued at the start price. Sell at once and the whole $16-a-share bargain ($50 − $34) is ordinary income; hold two years from the offering start and one year from purchase and, if the price has held, only $6 ($40 − $34) is.
RSUs. Restricted stock units become shares as they vest, and their value that day is taxed as wages, sold or not. Employers usually withhold at the flat 22% supplemental-wage rate (37% above $1 million a year), too little in the 24% bracket: 100 shares vesting at $60 are $6,000 of income, $1,320 withheld against $1,440 owed. Keeping them is the same as using a $6,000 bonus to buy your employer’s stock, tying income and savings to one company (7.7).
Student-loan help. Under Section 127 an employer can pay up to $5,250 a year of tuition or student-loan payments tax-free — one combined cap. The loan part was due to expire after 2025; the One Big Beautiful Bill Act made it permanent and indexes the $5,250 to inflation after 2026.
Salary $75,000. Match (6.5): 50% × $4,500 = $2,250. Employer health contribution — assume the 2025 KFF single-coverage average, $9,325 − $1,440 = $7,885 (the household’s own $2,600 share in 8.2 is above average). Total: $75,000 + $2,250 + $7,885 = $85,135, 13.5% above salary ($85,135 ÷ $75,000 = 1.135). The $7,885 is untaxed: buying it from pay taxed at 22% plus 7.65% FICA would take $7,885 ÷ (1 − 0.2965) = $11,208 of salary. An offer $3,000 higher with no match and a thin health contribution can be the lower-paying job.
Five questions for the first benefits meeting:
- What contribution rate collects the full match (6.5)?
- How does the match vest (6.7: Vesting, Rollovers, and What Happens When You Change Jobs)?
- What does each health plan cost per paycheck, and is there an HSA deposit (6.6, 8.2)?
- What life and disability coverage is included, and can I pay the disability premium after tax (8.4)?
- Is there an ESPP, education or commuter benefit, and when do elections close?
Open enrollment — typically a narrow window once a year — is usually the only chance to change most of these elections outside a “qualifying life event” (marriage, a new child, losing other coverage). Missing it means living with the prior year’s health, FSA and insurance choices for another twelve months; 401(k) and HSA contribution rates, by contrast, can usually be changed during the year.
All three are employer-sponsored retirement accounts governed by the same core mechanics — contributions deducted directly from payroll, invested in a menu the employer selects, growing tax-advantaged until withdrawal — differing mainly in which employer offers them:
| Plan | Typical Employer | Notable Feature |
|---|---|---|
| 401(k) | Private-sector, for-profit companies | The most common plan; the one referenced throughout this Part |
| 403(b) | Nonprofits, schools, hospitals, universities | Functionally near-identical to a 401(k), same contribution limits |
| 457(b) | State and local government employers (some tax-exempt nonprofits offer a non-governmental 457(b), usually only to highly paid staff, whose assets remain the employer’s and are exposed to its creditors) | No early-withdrawal penalty upon separation from service, at any age — and, unusually, can often be contributed to in addition to a 401(k)/403(b) if an employer offers both, doubling total tax-advantaged space |
For 2026, the employee elective-deferral limit across a 401(k) or 403(b) is $24,500, with a further $8,000 catch-up for those 50 and older, or an enhanced $11,250 “super catch-up” specifically for ages 60–63. The combined limit including employer contributions is far higher — $72,000 — which is exactly the room the “mega backdoor Roth” in 6.4 depends on. A worker aged 50 or older can therefore defer up to $32,500 in 2026 ($24,500 + $8,000), or $35,750 at ages 60–63 ($24,500 + $11,250).
New for 2026 — Roth-only catch-ups for higher earners: starting January 1, 2026, if your 2025 FICA wages (Form W-2, box 3) from the employer sponsoring the plan exceeded $150,000, every catch-up dollar you put into that employer’s 401(k), 403(b) or governmental 457(b) in 2026 must go in as Roth, not pre-tax. The rule comes from SECURE 2.0 (section 603); the IRS’s final regulations apply from 2027, and for 2026 plans must follow a reasonable, good-faith reading of the law. The $150,000 threshold is indexed to inflation in later years. A plan with no Roth option may simply bar affected employees from catch-up contributions, and self-employed people with no W-2 wages from the plan sponsor are outside the requirement.
The limits are simple for one person in one plan for a full year. These situations bend them.
| Situation | What changes | Why | Number or rule |
|---|---|---|---|
| Two employers in one year | Deferrals to both plans share one limit; the new plan does not know what you put into the old one | The elective-deferral limit belongs to you, not to each plan | $24,500 combined in 2026; an excess not paid back by April 15, 2027, is taxed twice, when deferred and when withdrawn |
| 403(b) plus a governmental 457(b) | Two full limits instead of one | 457(b) deferrals have a separate limit | $24,500 + $24,500 = $49,000 in 2026, before catch-ups |
| Front-loading deferrals early in the year | If the match is figured per paycheck with no year-end “true-up,” later paychecks get no match | Each paycheck’s match is computed on that paycheck’s deferral | At $150,000 and a 50%-up-to-6% match, deferring 20% hits $24,500 after 21.2 of 26 paychecks ($24,500 ÷ $1,153.85) and forgoes $730.77 of the $4,500 match |
| Income jumps past the Roth IRA range after you contribute | Part or all of the Roth contribution becomes an excess | Eligibility is tested on the year’s final modified AGI | Phase-out $153,000–$168,000 single; withdraw or recharacterize by the filing deadline including extensions, or owe 6% a year |
| Joining an HSA-eligible plan late in the year | You may contribute the full year’s amount, but only if you stay eligible | The last-month rule treats anyone eligible on December 1 as eligible all year, subject to a testing period | Stay eligible through December 31 of the next year, or the extra becomes taxable income plus 10% |
| Working past 65, enrolling in Medicare later | HSA contributions must stop six months before you sign up | Part A is backdated up to six months (not before the month you turned 65), and the HSA limit is zero for every Medicare month, retroactive ones included | Stop payroll HSA deposits six months before applying for Medicare or Social Security |
Every dollar contributed to a retirement account gets taxed exactly once — the entire traditional-vs-Roth decision is when. A traditional contribution goes in pre-tax, reducing this year’s taxable income exactly as Part 1.6: Paychecks Decoded showed, and is taxed as ordinary income upon withdrawal in retirement. A Roth contribution goes in after full income tax has already been paid, and grows and withdraws entirely tax-free.
Take a worker whose entire $10,000 falls inside the 22% bracket today. Contributed traditionally, it grows, untaxed, to $76,123 over 30 years at an assumed 7% annual return. The same $10,000 contributed as Roth is first taxed at 22%, leaving $7,800 invested, which grows tax-free to $59,376. The traditional balance still owes tax on withdrawal — and what it’s actually worth depends entirely on the tax rate in retirement:
At the same 22% rate in retirement, the traditional account nets exactly $59,376 after tax — mathematically identical to the Roth. At a lower 12% retirement rate, traditional wins: $66,988 after tax vs. Roth’s $59,376. At a higher 32% retirement rate, Roth wins: $59,376 vs. traditional’s only $51,763 after tax.
The example above assumes every dollar sits in the 22% bracket. The running household’s dollars do not. Part 1.6 put its 2026 taxable income at $51,800, and the single filer’s 22% bracket starts at $50,400 — so only its top $1,400 is taxed at 22%; the income below that is taxed at 12%.
Suppose it raises its traditional 401(k) contribution by $3,000 a year, from 6% to 10% of salary. The tax saving is $1,400 × 22% + $1,600 × 12% = $308 + $192 = $500 — a blended 16.7% ($500 ÷ $3,000), not 22%. The take-home cost is $3,000 − $500 = $2,500 (FICA still applies to 401(k) deferrals). The same $2,500 of take-home pay could go in as Roth instead.
Over 30 years at 7% (1.0730 = 7.612): the traditional $3,000 grows to $22,837, worth $20,096 after a 12% retirement tax rate or $17,813 after 22%; the $2,500 Roth contribution grows to $19,031, untaxed. The break-even retirement rate is the blended 16.7% saved going in: below it traditional wins, above it Roth does. A household near a bracket boundary should do this arithmetic rather than assume its top bracket applies to every dollar.
The entire decision reduces to one uncertain forecast: will your tax rate in retirement be higher, lower, or the same as it is today? Early-career workers, typically in a lower bracket now than they expect to be later, often lean Roth; workers at or near their peak earning years, expecting a lower rate after they stop working, often lean traditional. Many financial planners suggest splitting contributions between both as a hedge against not knowing the answer with confidence — this is a defensible position, not indecision.
A traditional account has a silent partner: the government owns a share of it equal to whatever your tax rate will be when you withdraw, and that share grows right alongside yours. A Roth contribution buys the partner out on day one, at today’s tax rate. The buyout is a good deal if the partner’s share would otherwise have been larger later — your retirement rate turns out higher than today’s — and a bad one if it had been smaller. Either way the partner’s share compounds at the same rate as yours, which is why the investment return drops out of the comparison and only the two tax rates matter.
An IRA (Individual Retirement Account) is opened independently of any employer, with its own 2026 contribution limit of $7,500 ($1,100 catch-up at 50+) — separate from, and in addition to, whatever room a 401(k) provides. Both traditional and Roth versions exist, following the same logic as 6.3, but Roth IRA contributions begin to phase out at $153,000 of modified AGI for single filers and stop entirely at $168,000 ($242,000–$252,000 married filing jointly) in 2026. Anyone with earned income can contribute to a traditional IRA, but if you are covered by a workplace plan the deduction phases out — between $81,000 and $91,000 for a single filer and $129,000–$149,000 for a married couple filing jointly ($242,000–$252,000 for a spouse who is not covered but whose partner is).
For anyone whose income is above the Roth IRA limit ($168,000 single, $252,000 married filing jointly in 2026), the backdoor Roth — contributing to a traditional IRA (which has no income limit) and immediately converting it to Roth — remains a fully legal strategy in 2026; despite periodic legislative proposals to close it, none has been enacted. A mega backdoor Roth goes further, using a 401(k) plan’s after-tax contribution feature (where offered) to move substantially more than the $7,500 IRA limit into Roth status each year, up to the $72,000 combined limit from 6.2.
Five questions on this chapter. Decide on your answer first, then click “Reveal Answer.”
1. Job A pays $80,000, matches 50% of contributions up to 6% of pay and puts $7,885 toward health premiums. Job B pays $83,000 with no match and a $3,000 health contribution. If the worker contributes 6%, which pays more in total compensation?
- Job A, by $4,285
- Job B, by $600
- Job A, by $4,885
- Job B, by $3,000
Reveal Answer
Answer: A. A = $80,000 + $2,400 match + $7,885 = $90,285; B = $83,000 + $3,000 = $86,000. Salary alone ($3,000) or salary plus match ($600) misses the health share; $4,885 ignores salary and match. Untaxed benefits widen A’s lead. (Part 6.1: Reading Your Benefits Package)
2. A 61-year-old whose 2025 FICA wages from her employer were $200,000 wants to make the largest 401(k) elective deferral allowed in 2026. What applies?
- $32,500, with the catch-up pre-tax if she prefers
- $35,750, with the $11,250 catch-up made as Roth
- $35,750, every dollar pre-tax if she prefers
- $72,000, split between pre-tax and Roth as she likes
Reveal Answer
Answer: B. Ages 60–63 get the $11,250 super catch-up on top of $24,500, and from 2026 anyone whose prior-year FICA wages from the plan sponsor exceeded $150,000 must make catch-ups as Roth. $72,000 is the limit including employer money. (Part 6.2)
3. A single filer’s 2026 taxable income is $60,000; the 22% bracket starts at $50,400, and income below it is taxed at 12%. How much federal income tax does raising traditional 401(k) contributions by $12,000 save?
- $3,558
- $2,640
- $1,440
- $2,400
Reveal Answer
Answer: D. Only $9,600 of the $12,000 sits in the 22% bracket: $9,600 × 22% + $2,400 × 12% = $2,400, a blended 20%. $2,640 assumes every dollar at 22%; $3,558 adds 7.65% FICA, which deferrals do not escape. (Part 6.3)
4. Worked problem: A worker earns $80,000, contributes 6% and the employer matches 100% of the first 4%. What are the employee, employer and total contributions?
Reveal Answer
Answer: Employee = $4,800; employer = 4% × $80,000 = $3,200; total = $8,000.
5. Worked problem: $6,000 is invested for 30 years at 7%. Traditional: the deduction is worth 22% now and withdrawals are taxed at 12%. Roth: contribute after-tax. Which ends with more after tax?
Reveal Answer
Answer: Traditional = $6,000 × 1.0730 × 0.88 = $40,193. Roth = $4,680 × 1.0730 = $35,625. Traditional wins by $4,567 because the retirement rate is lower.
- Publication 969 — HSA rules
- Publication 15-B (2026) — Dependent-care exclusion
- 401(k) limit increases to $24,500 for 2026 — 2026 plan and IRA limits
- Instructions for Form 8606 — Pro-rata rule
- Retirement topics: catch-up contributions — Catch-ups and the Roth catch-up rule
- Final regulations on the Roth catch-up rule — Roth catch-up effective dates