Today we are going to be talking about the differences of ROTH IRA. IRA. 401K, ect. I,m sure most of you really don’t understand what most of those are, and thats why we are going to be going in depth about each one and talking about there pros and cons.
What retirement plans best for me
It depends on your situation, where you work, your income, ect. Below we will cover all mainstream retirement accounts and talk about what type of person they suit, and there advantages and disadvantages. By the end I hope you walk away alittle more enlightened about retirement plans and hopefully decide whats best for you
I want to build my retirement in the stock market
Great, now you have to pick your stocks, unless you have your broker do this. Either way this can be a very daunting task, especially if your afraid of losing money. I wouldn’t recommend building a retirement in a brokerage account, i would recommend a IRA, 401K or a ROTH. Lets talk about all the advantages of each one
The ROTH IRA and 401K are very similar. They have the idea of investing for retirement, they have a lot in common really. Lets talk about what a 401K is
A 401K is a retirement plan that most employers offer. You can invest a percentage of your salary or a certain amount each month. You make your investments with pretax money. In other words, whatever you invest is taken out of your paycheck before your income is taxed
401K is named after the sub sect of the IRS code that talks about retirement plans. The money you invest can go into several different types of mutual funds depending on your plan.
A huge plus of 401K plans is that your employer(Only ONE employer) can match your investment up to a specific amount. Matching isn’t required by law, so not all employers offer it. If your company offers a 401k, figure out if your employer offers a match so you can make the most of your investing dollars. So practically your getting money from your employer for simply having a 401K
- You can only invest 19,000 per year in a 401K
- not including the employer match. If you’re over 49 years of age, you can add an additional $6,000 per year, for a total of $25,000.
- Employer match. If your employer offers a match, you should take advantage of it.
- No income level limit. Anyone can invest in their employer’s 401(k), regardless of income.
- Tax break. You invest in your 401(k) with pretax dollars, lowering your taxable income for that year.
Disadvantages Of A 401(K)
- Fewer options for mutual funds. Your employer hires a third-party administrator to run the company’s retirement plan. That administrator determines which mutual funds you can invest in, limiting your options.
- Waiting period. If you’re new to a company, you may have to wait to participate in a 401(k) plan.
- Required minimum distributions(RMDs). You can’t leave your money in your 401(k) forever. Beginning at age 70 ½, you must start withdrawing a certain amount of your savings each year, or you’ll pay a penalty. Also—there are penalties for withdrawing money before age 59 ½.
Roth IRA (Individual Retirement Arrangement) is a retirement account you can open by yourself. Unlike a 401(k), you contribute to a Roth IRA with after-tax money. A Roth IRA allows your savings to grow 100% tax free, yes you heard that right, tax free. When you finally celebrate turning 59 you can start drawing money from your account tax free, no joke.
An IRA is a great option for those that are self employed or if you work for small business that dosn’t offer a 401K plan. If by chance you do have a 401(k), you could save extra money and even diversify if you wish
Advantages Of A Roth IRA
- Tax-free growth. The biggest benefit is the tax break. Since you invest in your Roth IRA with money that’s already been taxed, the growth isn’t taxed, and you won’t pay any taxes when you withdraw your money at retirement.
- More investing options. With a Roth IRA, you don’t have a third-party administrator deciding which funds you can invest in, so you can choose any mutual fund you like. But be careful: Always seek good advice when choosing mutual funds, and make sure you fully understand how they work before you invest any money.
- Set up apart from an employer. Unlike a workplace retirement plan, you can open a Roth IRA at any time as long as you deposit the minimum amount. The amount will vary based on who you open your account with.
- No required minimum distributions (RMDs). With a Roth IRA, you won’t be penalized if you leave your money in your account after age 70 ½ as long as you hold the Roth IRA for at least five years. Like the 401(k), you’ll be penalized for taking money out of a Roth IRA before age 59 ½ unless you meet specific requirements.
- The spousal IRA. If you’re married but only one of you earns money, you can still open an IRA for the non-working spouse. The spouse who earns money can invest in accounts for both spouses—up to the full amount! A 401(k), on the other hand, can only be opened by someone earning an income.
Disadvantages Of A Roth IRA
- Contribution limit. You can only invest up to $6,000 in a Roth IRA each year or $7,000 if you’re age 50 or older.(2) That’s a lot less than the 401(k) contribution limit.
- Income limits. If you’re single or the head of a household, your modified adjusted gross income (MAGI) has to be less than $122,000 to contribute the full amount to a Roth IRA. If you’re married and file your taxes jointly with your spouse, your MAGI must be less than $193,000. If your income is above these limits, the amount you can invest is reduced. And if you make $137,000 or more as a single individual or $203,000 or more as a married couple filing jointly, you’re not eligible for a Roth IRA.(3) However, the traditional IRA would still be an option.
Roth IRA Vs. 401(K): What Are The Major Differences?
The main difference is how the two accounts are taxed. With a 401(k), you invest pretax dollars, lowering your taxable income for that year. But with a Roth IRA, you invest after-tax dollars, which means your investments will grow tax free.
Lets not forget the traditional IRA
A traditional IRA allows you to direct pre-tax income toward investments that can grow tax free. The IRS assesses no gains or dividend yields income taxes until you make a withdraw . Individual taxpayers can contribute 100% of any earned compensation up to a certain maximum dollar amount. Income thresholds may also apply. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors.
Retirement savers may open a traditional IRA through their broker (including online brokers or robo-advisors) or financial advisor.
Disadvantages to a traditional IRA
1. You’ll pay taxes in retirement
2.You may not get that up-front tax deduction
3.2. You’ll be subject to required minimum distributions
Advantages of a traditional IRA
1 Someone can always contribute to their traditional IRA
2 Wait to pay Lower taxes in retirement
3 You may not get a up front tax deduction