Understanding 401(k) Plans and IRAs: A Guide for Parents

When you’re raising children, every dollar matters—and every future plan feels personal. Between daycare costs, groceries, and saving for college, it’s easy to put retirement savings on the back burner. But the truth is, securing your future is one of the best gifts you can give your family.

If you’re unsure where to begin, this guide is here to help. We’re breaking down the 401(k) basics, exploring key IRA options, and offering clear insights into how these retirement accounts work—especially for parents juggling multiple financial priorities.

Why Retirement Planning Is Essential for Parents

Raising a family comes with plenty of financial commitments, but retirement planning should still be part of your overall strategy. Here’s why:

• You can’t borrow for retirement the way you can for college
• Starting early means saving less overall, thanks to compound interest
• Your family depends on your financial stability, both now and in the future

The good news? You don’t need to be a financial expert to get started—you just need the right information and a plan that fits your life.

401(k) Basics: What Every Parent Should Know

A 401(k) is a retirement savings plan offered by many employers. It allows you to contribute a portion of your paycheck into a tax-advantaged investment account.

Key Features of a 401(k):

• Pre-tax contributions: Your contributions are made before income tax is deducted, reducing your taxable income now.
• Tax-deferred growth: You don’t pay taxes on investment gains until you withdraw funds in retirement.
• Employer match: Many companies match a percentage of your contributions, which is essentially free money.
• Contribution limits: For 2024, you can contribute up to $23,000 annually (or $30,500 if you’re over 50).

Why Parents Love the 401(k):

It’s automated, it’s convenient, and it’s often the first—and easiest—step toward retirement savings. If your employer offers a match, aim to contribute at least enough to get the full match. Anything less is leaving money on the table.

IRA Options: More Flexibility for Diverse Needs

If you don’t have access to a 401(k)—or want to supplement it—Individual Retirement Accounts (IRAs) offer another smart path forward. There are two primary types: Traditional IRAs and Roth IRAs.

Traditional IRA

• Contributions may be tax-deductible
• Growth is tax-deferred
• Taxes are paid when you withdraw funds in retirement
• Annual contribution limit: $7,000 in 2024 (or $8,000 if you’re over 50)

Best for: Parents who want to reduce their current tax burden and expect to be in a lower tax bracket in retirement.

Roth IRA

• Contributions are made with after-tax income
• Withdrawals (including earnings) are tax-free in retirement
• No taxes on qualified withdrawals
• The same annual contribution limits apply

Best for: Younger families with lower current income who expect to be in a higher tax bracket later. Roth IRAs are also more flexible—contributions (not earnings) can be withdrawn at any time without penalty, which can be helpful in emergencies.

Choosing Between a Traditional and Roth IRA

Think of it this way:

• If you want tax savings now, go to Traditional
• If you prefer tax savings later, go to Roth

Many families benefit from having both types, depending on income level, long-term goals, and tax strategy.

Retirement Accounts Explained: How They Work Together

You’re not limited to choosing just one account. In fact, combining different types of retirement savings accounts can give you greater flexibility and tax advantages later in life.

Here’s how they can complement each other:

• Primary savings through a 401(k) to take advantage of employer matching
• Secondary savings in an IRA to diversify tax treatment and broaden investment options
• Use Roth contributions to create tax-free income streams in retirement
• Catch-up contributions (available at age 50+) to boost savings in your later working years

And don’t forget about Health Savings Accounts (HSAs)—if you qualify, they can also serve as tax-advantaged retirement savings for medical expenses.

Tips for Parents Getting Started

1. Start Small and Be Consistent

Even $25–$50 a month makes a difference. Increase your contributions gradually over time.

2. Automate Contributions

Set up automatic transfers or payroll deductions. “Set it and forget it” helps keep your savings on track without thinking about it.

3. Reassess Annually

As your income and expenses change, so should your savings rate. Review your accounts each year, especially during open enrollment.

4. Don’t Pause for Parenthood

It’s tempting to put retirement savings on hold during expensive phases like early childhood. However maintaining even modest contributions can keep you on track long-term.

5. Talk to a Financial Advisor

They can help assess your specific needs, especially if you’re balancing retirement planning with saving for college or managing debt.

What If You’re Behind?

Many parents feel like they’re “late” to retirement saving, but it’s never too late to start. If you’re catching up:

• Max out contribution limits
• Take advantage of catch-up contributions if over 50
• Focus on tax-advantaged accounts
• Consider adjusting your retirement timeline
• Reduce current expenses to free up funds

Small steps today can still lead to meaningful savings tomorrow.

Final Thoughts: Building Your Family’s Financial Future

Raising kids and planning for retirement might feel like a financial juggling act—but it doesn’t have to be all or nothing. With a basic understanding of 401(k) basics, insight into IRA options, and a flexible mindset, you can make steady progress toward a future that supports both your children and yourself.

By starting now, even modest contributions can grow into lasting security. Your future self—and your family—will thank you.