Does deciding between a 401(k) or Roth IRA feel like flipping a coin? The good news is that it doesn’t have to be heads or tails. Maggi Tax recommends using both retirement accounts to diversify your tax benefits so you can take full advantage of both accounts. But, let’s explore and compare 401(k)s and Roth IRAs so you can choose the best fit for your financial goals.
401(k)s and Roth IRAs are two of the most popular retirement savings vehicles. Both options allow employees to save for retirement but they differ in a few ways. Unlike Roth IRAs, the 401(k) is an employer-sponsored retirement plan widely offered by most private sector companies in the United States. Typically, any 401(k) contributions you have chosen to make are withheld from your paycheck pre-tax. The money is then deposited and all investments grow tax-deferred in an account. Any withdrawals are subjected to income taxes during retirement. Currently, the IRS allows employees to contribute up to $20,500 to their 401(k). For those 50 years and older, there is an additional “catch-up” contribution of $6,500 for a total of $27,000. As an added bonus, most companies offer employer matching at certain percentages so make sure to take advantage of this free money!
A Roth IRA differs from a 401(k) in that it is an individual retirement account. It allows employees to save for retirement outside the scope of an employer-sponsored plan. Roth IRA contributions are made after-tax so it does not reduce your taxable income in the current year. However, once added to the account, you will never have to pay taxes on the amount again. You may begin taking tax-free withdrawals at 59 ½ years old. Currently, contribution limits are significantly lower than a 401(k) at only $6,000. Similarly to 401(k)s, there is a “catch-up” contribution for those 50 years and older but only for an additional $1,000. One important thing to note about Roth IRAs is that you may only contribute to them if you have earned income.
This brief introduction to 401(k)s and Roth IRAs is by no means exhaustive. Working with a tax professional can help you identify the best financial decisions for your goals. Contact Maggi Tax here or call (727) 799-1701 to schedule your appointment today.