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  • Writer's pictureBruderman & Company

What’s the Difference Between Roth IRA and 401(k)?

If you don’t want to run out of money in retirement, you’ll want to plan ahead. Retirement planning in 10601 largely involves knowing the rate of return you require on your investments, the risk you’re willing to take, and the amount of money you can safely withdraw from your portfolio.

Two of the most popular tax-advantaged retirement savings accounts include Roth IRAs and 401(k)s. To choose wisely, it’s important to know the difference between both.

Knowing the Difference Between Roth IRA and 401(k)

What Are Roth IRA Plans?

Roth IRA was established in 1997 after a former Delaware Senator named William Roth. Unlike 401(k)s, it doesn’t involve your employer. These accounts are funded with after-tax dollars, and the contributions aren’t tax-deductible.

Although it allows qualified withdrawals on a penalty- and tax-free basis, certain conditions have to be satisfied. For instance, the account has to be open for at least five years, and the withdrawal has to be made after age 59 ½. Essentially, known as a variation of traditional individual retirement accounts, Roth IRAs are set up between an investment firm and an individual.

  • Investment Options

If you’re an IRA holder, what your plan provider offers doesn’t limit your choices for investment as you set up and control the account. Although those providers charge higher fees, you’ll still enjoy a greater degree of investment freedom compared to employees with 401(k) plans.

  • Contribution Limits

The contribution limits with Roth IRA accounts are much smaller compared to 401(k)s. For example, the maximum annual contribution is $6,000 if the account holder is aged 50 or below. However, if the account holder is 50 years old or higher, the annual contribution limit is $7,000, including a $1,000 catch-up contribution.

  • Income Limits

The amount of money you earned in a specific year determines how much you can contribute to a Roth IRA account. This means that your income and the filing status for your taxes significantly influence the reduction or elimination of your contribution amount.

What Are 401(k) Plans?

A 401(k) is an employer-sponsored retirement plan that was named after the Internal Revenue Code’s section 401(k). To make a contribution, a portion of each paycheck has to be designated to divert into the plan. Your contributions are made before your income taxes are deducted from each paycheck.

  • Investment Options

The plan provider typically offers a combination of mutual funds and exchange-traded funds that contain a basket of stocks or securities. The Internal Revenue Service (IRS) doesn’t tax investment gains realized within the plan until you withdraw the funds.

  • Contribution Limits

401(k) contribution limits are much higher than Roth IRAs. For instance, if you’re under the age of 50, your contribution limit is $19,500. However, if you’re age 50 or older, your contribution limit is $26,000, including an extra $6,500 for a catch-up contribution.

  • Employer Match

When your employer offers a match, they contribute additional cash to your 401(k) account. The basis of the match is a certain percentage of your contribution up to a percentage of your salary. Your employer may match about 50% of your contributions up to around 6% of your salary.

The team of financial experts at 1879 Advisors is ready to provide you with the tools you need for expert retirement planning. To have an idea about how much you need to save up, contact us today to schedule an appointment.

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