Welcome to the second installment of our Roth 401(k) insight series! Today, we delve into the distinctions between a Roth 401(k) and a Traditional 401(k).
While these retirement accounts share many similarities, they cater to different individuals. If immediate tax savings are your goal, the traditional 401(k) is your choice. On the other hand, if you’re eyeing tax savings during retirement, the Roth 401(k) is the preferred option.
However, you don’t have to make an either-or decision. It’s entirely possible to split your retirement savings between the two. This strategy not only allows you to diversify your tax risk in retirement but also accommodates uncertainties in future income and tax law changes.
Now, let’s compare the Roth 401(k) with the Roth IRA. In 2023, Roth IRAs have an annual contribution limit of $6,500, while Roth 401(k) plans permit contributions of up to $22,500—more than triple the limit of Roth IRAs.
Some individuals choose a traditional 401(k) through their employer and supplement it with a Roth IRA to balance their tax burden in retirement. As Roth 401(k) availability grows, employees face the dilemma of choosing between a Roth 401(k) and a Roth IRA. The IRS, however, may make the decision easier for you.
The Roth 401(k) imposes no income limit, making it accessible to anyone, regardless of income. In contrast, Roth IRAs target lower- and middle-income savers. The AGI phase-out range for married couples filing jointly is $218,000 to $228,000, and for singles, it’s $138,000 to $153,000. This range determines contribution limits—if your income falls within it, you may face contribution phase-out rules.
In conclusion, if a Roth 401(k) appeals to you but your company doesn’t offer it, consider advocating for its inclusion. The longer your savings grow in a Roth 401(k), the greater the tax-free earnings as compounding takes effect.
Thank you for concluding the Roth 401(k) series with us. Stay tuned for our upcoming retirement topic videos!
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