ARE YOU SAVING FOR RETIREMENT CORRECTLY? Roth IRAs and 401(k)s are both tax-advantaged accounts that help individuals save for retirement. They differ in their employer matches/contributions, investment options and tax treatment. Knowing which retirement account to allocate your money into will make a crucial difference in your quality of life during retirement. What is a Roth IRA? A Roth IRA allows an individual to save post-tax income up to a specific amount every year. Earnings on this account and any withdrawals after the age of 59 ½ remain tax-free. What is a 401(k)? A 401(k) is an employer- sponsored retirement savings plan. It is tax-deferred; therefore, a percentage of your paycheck goes into the 401(k), and the employer can match a percentage of that contribution. Should I choose a Roth IRA or 401(k)? Understanding the difference between the two plans is vital to deciding which you should invest in. An individual might prefer a Roth IRA if they will likely be in a higher tax bracket in the future. For a 401(k), you defer taxes on that income, meaning it is tax-free until you start withdrawing no earlier than age 59 ½. For a Roth, you pay taxes on your income at the time of the earning, and then an amount is allocated to your retirement account. There, it grows and is never taxed again as long as you wait until age 59 ½ to use it. The critical distinction is that a Roth is after-tax while a 401(k) is tax-deferred. While tax-timing is the main distinction between the two plans, there are other significant differences, such as 401(k) employers often offer to match your contributions up to a certain percentage. On the other hand, others do partial matches where the business meets a fraction of the employee's contribution. For example, if you contribute 8% and the employer matches 50%, your contribution on a $50,000 salary would be $4,000, and your employer would add $2,000 of free money. Both the Roth and 401(k) have distinct limitations. In accordance with the United States tax code, employees may contribute up to $20,500 to their 401(k) regardless of income level. Conversely, contributions can only be made up to $6,000 for a Roth IRA. Additionally, to contribute to a Roth IRA, income must be under $144,000 per year if filing single or $214,000 if married and filing jointly. Verdict: Which Plan is Better? There is no better retirement plan. Both are crucial tools to save for retirement, but one of them could be best for your situation. The Roth IRA is beneficial if you expect to be in a higher tax bracket in retirement because the taxes were already paid on this money. A 401(k) is optimal if your earnings will decrease later on or if your employer matches your contribution. The ideal strategy for able individuals is to max out both a Roth IRA and 401(k). This is because you want to take advantage of any employer match in a 401(k) and enjoy the tax-free distributions in retirement from a Roth IRA.
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