401k Plan vs. a Roth IRA

calculator-1680905_640Saving for retirement is something that you shouldn’t neglect or put off any longer than you have to. When you do decide to start saving for your retirement, it is critical that you know what type of account that you are going to use. This is because there are several differences between account types that may impact how your money is taxed, which could play a role in how much you actually have when it comes time to stop working.

The Differences between a 401K and an IRA

A 401K is an employer sponsored plan that allows you to contribute the lesser of $18,000 or 100 percent of your income each year. Your employer may also choose to contribute to your 401K or match any contributions that you make. Employer contributions can total up to 25 percent of your wages for the year or 20 percent if the company is a sole proprietorship. If you run your own company, you can contribute as both an employee and employer.

An IRA is an individual retirement account that is held with a bank or any other financial institution that offer them. You can generally contribute up to $5,000 a year or up to $6,000 a year if you are over the age of 50. While you can have multiple IRAs, you are still limited to $5,500 or $6,500 in total contributions.

The Differences Between Traditional and Roth Plans

A traditional 401K or IRA allows you to contribute to your account using pretax dollars. This lowers your tax burden for the year, and the money placed into your account grows tax-free until you take it out. However, you cannot make a withdrawal unless you are 59 1/2 or older or are using it for medical or educational expenses.

A Roth IRA or 401K uses after tax dollars to fund your retirement. The benefit is that you don’t have to pay taxes when you withdraw your money later in life. You also don’t pay taxes on the gains that you earn while the money is in your account. Finally, you can withdraw any of your initial contributions without penalty. This is because the money has already been taxed and is yours to use as you see fit.

Specific Differences between a Roth IRA and a 401K Plan

There are a few specific differences between a Roth IRA and a 401K plan. For instance, you have until April 15 to make a contribution or until October 15 if you file for an extension to file your tax return. To get any tax benefit from a 401K, you have to make the contribution by the end of the tax year. This means that your contribution deadline is December 31.

A Roth IRA may not be available to those who make more than $132,000 in a year or married couples that make more than $194,000 in a given year. The amount that you can contribute to a Roth IRA is reduced for single filers who make between $117,000 and $131,999 and married filers who make between $184,000 to $193,999.

Roth IRAs can generally be funded by securities such as money in a mutual fund or other type of brokerage account. It may also be possible to make contributions with shares that you own in companies that offer car title loans in Missouri. They can also be funded through a rollover or through a contribution made by another individual. A regular IRA can generally only be funded with cash while 401 K contributions are all cash as well.

Rolling a 401K into a Roth IRA

If you lose your job, you can transfer your 401K into a Roth IRA assuming that you meet income and other requirements. The best way to make the rollover is to have the company that administers your 401K send a check to your bank or financial institution that administers your IRA. Your other option is to have a check made out to yourself and then deposit that check into a new IRA. This may be beneficial if you need money quickly and repay the balance within the 60 day grace period offered by the IRS.

It is important that you understand the difference between standard and Roth accounts as well as the difference between an IRA and a 401K. If you need any help understanding your options, it may be a good idea to talk with your employer’s benefits department or talk to a financial adviser who can help you make the most of your savings.

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