A client came to us completely baffled. She’d been contributing to her retirement account for years, doing everything right, or so she thought. But her balance was barely moving. Turns out she’d been transferring money into the account and just leaving it there, never actually buying anything with it. That money sat like cash stuffed under a mattress, except this mattress had a fancy label on it that said “401k.”
This happens all the time, way more than you’d expect. People hear “open a 401k” or “start an IRA,” follow through on that advice, then miss the second step that actually makes their money work. Others don’t fully understand the tax implications of what they’re doing, picking between traditional and Roth accounts without realizing what that choice really costs them decades later.
This blog walks you through the two-step process of retirement accounts and the tax decision that can save (or cost) you a fortune. Whether you’re self-employed with a solo 401k, working a W-2 job, or just starting to think about this stuff, you need to get this right.
Step One: Transferring Money Into the Account
Let’s start with the basics, because even the basics trip people up.
When you contribute to a 401k or an IRA, you’re moving money from one place to another. If you’re employed, your employer withholds a portion of your paycheck and routes it into your 401k account. If you’re self-employed, you transfer funds from your business bank account into a solo 401k or IRA. That’s it. That’s step one. Money moves from point A to point B.
Think of your retirement account as a box, a separate vehicle totally distinct from your regular checking or savings accounts. Step one is putting cash into that box.
But here’s where the confusion starts. Most people think putting money in the box is the whole process. It’s not, and not even close. That’s the mistake that cost our client years of potential growth.
“I put money in my 401k. Why isn’t my balance changing?”
If you’ve ever asked yourself that question, keep reading.
Step Two: Actually Investing the Money
Transferring money into a retirement account doesn’t automatically invest it. The money just sits there, usually in a cash or money market position, earning next to nothing. You have to take that money and purchase investments. Stocks, bonds, mutual funds, ETFs. Whatever fits your approach and risk tolerance, but you have to do something with it.
The two-step process looks like this:
- Transfer funds into your 401k, IRA, or solo 401k account
- Invest those funds by purchasing stocks, bonds, mutual funds, ETFs, or other investment vehicles within the account
Miss step two, and your retirement account is basically a savings account with extra restrictions. Worse than a savings account, actually, because at least a high-yield savings account earns some interest.
Our client had done step one perfectly for years. She was disciplined, consistent, and never missed a contribution. But nobody told her about step two. When we flagged it, she was shocked, and honestly relieved, because the fix was straightforward. She just needed to allocate those funds into actual investments.
Pro tip: If you’re using an employer-sponsored 401k, check whether your plan has an auto-invest feature or a default fund. Some do, some don’t. Don’t assume. Log into your account, look at your holdings, and confirm your money is actually invested in something. Five minutes of checking could save you decades of lost growth.
And if you’re self-employed running a solo 401k or a self-directed IRA, this responsibility falls entirely on you. Nobody’s going to do it for you.
Understanding the Tax Side: Traditional vs. Roth Accounts
Now let’s talk about the second big area where people get tripped up: taxes.
A lot of people think retirement accounts give them “tax-free money.” That’s a dangerous oversimplification. The tax treatment depends entirely on which type of account you have, and the difference between traditional and Roth is massive.
How Traditional 401k and IRA Accounts Work
With a traditional 401k or traditional IRA, you get a tax deduction on the way in. In plain English, the money you contribute reduces your taxable income for that year.
Here’s the math. Say you earn $100,000 and contribute $10,000 to your traditional 401k. You’re now only taxed on $90,000. That $10,000 contribution gave you a deduction, lowering your tax bill right now.
But there’s a catch.
That money grows over time, assuming you did step two and actually invested it. Let’s say that $10,000 turns into $100,000 over 20, 30, or 40 years. When you hit retirement age and start pulling money out, you pay tax on those withdrawals. All of it counts as income. So you pull out $100,000, and you owe income tax on the full amount. No penalties if you’re of retirement age, true. But taxes? Absolutely.
A lot of people miss this. They think “no penalties” means “no taxes.” It doesn’t.
| Feature | Traditional 401k/IRA |
|---|---|
| Tax on contributions | Deductible (reduces taxable income now) |
| Tax on growth | Tax-deferred (no tax while it grows) |
| Tax on withdrawals | Taxed as ordinary income |
| Best if | You expect to be in a lower tax bracket in retirement |
How Roth IRA and Roth Solo 401k Accounts Work
Roth accounts flip the order. You pay tax on the money before it goes in, so there’s no upfront deduction. But at retirement age, there’s zero tax on the growth.
Let’s break it down. You have $10,000 in income. After taxes, you might have $7,000 left to put into a Roth IRA. Over the decades, that $7,000 grows to $100,000. When you pull it out in retirement, you’re not paying a dime in taxes on that gain. That’s the appeal of a Roth.
| Feature | Roth IRA / Roth Solo 401k |
|---|---|
| Tax on contributions | Taxed (no deduction on the way in) |
| Tax on growth | Tax-free |
| Tax on withdrawals | Tax-free (qualified distributions) |
| Best if | You think tax rates will rise or want tax-free retirement income |
So Which One Should You Choose?
This is where strategy matters, and where a good CPA for content creators, freelancers, or self-employed business owners earns their fee.
The core question is simple. Do you think you’ll pay a higher tax rate now or later?
If you look at historic tax rates over time, there’s a reasonable argument that rates are going up, and as of the time of writing many financial professionals lean this way. If that’s the case, paying tax now through a Roth account and enjoying tax-free withdrawals later starts to look very attractive.
But there’s no one-size-fits-all answer. Your current income, your expected retirement income, your business structure (whether you’re weighing S corp vs LLC, sole proprietorship, or something else), your state taxes, your other deductions. All of it factors in. An international tax accountant or CPA who understands your specific situation can help you make this call with confidence.
What we will tell you is this: don’t default into a traditional account just because it’s the path of least resistance. Make an intentional choice. Running the numbers through an S corp tax calculator can also reveal how your entity type affects your overall tax picture going into retirement.
The Self-Directed Option: Going Beyond Stocks and Bonds
If you set up a self-directed IRA or a solo 401k (available if you’re self-employed), you’re not limited to traditional investments like stocks, bonds, and mutual funds. You can invest in:
- Private equity
- Real estate
- Cryptocurrency
- Loans
- And more
The famous example is Peter Thiel, who invested through a self-directed Roth IRA into Facebook and other early-stage companies. The growth inside that Roth was astronomical, and because it was a Roth, the gains are shielded from tax.
Most of us aren’t going to find the next Facebook. But the principle stands. Self-directed accounts open up investment options that traditional brokerage-managed accounts don’t, and if you pair that flexibility with Roth tax treatment, the upside potential is enormous.
This is especially relevant if you’re evaluating your business structure. Whether you’re comparing S corp vs C corp for your business or figuring out how much it costs to start an LLC, understanding how your entity structure connects to your retirement planning matters.
The solo 401k, for example, is only available to self-employed individuals and business owners with no full-time employees other than a spouse. Your business structure dictates what’s available to you.
The Action Plan: What to Do Right Now
Don’t just read this and nod along. Here’s exactly what to do.
If you already have a retirement account:
- Log in today. Check whether your money is actually invested or just sitting in cash. If it’s sitting in cash, you’ve found the problem.
- Review your investment allocations. Confirm your funds are in a diversified mix appropriate for your age and risk tolerance.
- Confirm your account type. Know whether you have a traditional or Roth account, and understand what that means for your taxes now and in retirement.
If you don’t have a retirement account yet:
- Decide on the account type. Traditional or Roth? Talk to your accountant or CPA about which makes sense given your income, business structure, and tax situation.
- Open the account and fund it. Step one, get the money in there.
- Invest the money immediately. Step two, don’t let it sit. Choose your investments, even if it’s a simple index fund or target-date fund to start.
If you’re self-employed:
- Explore a solo 401k or self-directed IRA. These give you higher contribution limits and more investment flexibility than a standard IRA.
- Consider the Roth option. A Roth solo 401k lets you combine the higher contribution limits of a 401k with the tax-free growth of a Roth.
- Work with someone who knows your niche. A generalist accountant might not flag these opportunities. Find an accountant for influencers, freelancers, or whatever your specific situation is.
Don’t Let Your Money Just Sit There
Retirement planning isn’t complicated once you understand the mechanics. Two steps: transfer and invest. Two tax options: pay now or pay later.
But getting these basics wrong costs people years of growth and potentially tens of thousands of dollars in unnecessary taxes. Our client was lucky. We caught the mistake, she invested her funds, and she’s on track now. But she lost years of potential growth that she’ll never get back.
You don’t have to make the same mistake. Check your accounts, verify your money is working, and make an informed decision about your tax approach.
Friends don’t let friends leave retirement money uninvested. Share this with someone who needs to hear it.
About The Author:
Cameron Botes is the founder of BizBud, a tax and accounting firm built for content creators, influencers, digital nomads, and entrepreneurs building businesses across borders. A former professional soccer player across four continents, Cameron brings the same discipline, preparation, and pressure-tested execution from his athletic career into helping business owners plan ahead, stay compliant, and keep more control over their financial future.
Since founding BizBud in 2020, Cameron has grown the firm from a one-person practice into a team of CPAs and tax advisors serving hundreds of clients across the U.S. and around the world. With an MBA in finance and accounting, international business experience, and a team with backgrounds at firms like PwC, Deloitte, and EY, Cameron helps creators and founders simplify taxes, clean up their books, and build smarter systems so they can focus on the work they actually love.
