Thinking of Saving Money for Retirement_ Here Are Two of the Best Options for You_ Roth IRA V_S 401 (K)

1. Thinking of Saving Money for Retirement? Here Are Two of the Best Options for You: Roth IRA V/S 401 (K) To earn monthly income even after retiring, the majority of salaried professionals prefer saving a part of their income while they are employed. If you are one of those, who want to live a healthy and stress-free post-retirement life, then you don’t even have to choose one option between Roth IRA vs 401 (K). Because an intelligent choice would be to invest in both retirement accounts. Let’s see Roth IRA vs 401K. However, before deciding on making any investment it is important to have in-depth knowledge about that investment product. Here is a detailed discussion on how Roth is different from traditional retirement investment products. Roth V/S Traditional Usually, all investment products that have a maturity period of more than five years are tax-saving investment products. Moreover, the sole purpose of investments in these products is to secure income even after retiring. Also, it helps professionals in saving up extra money for the future, from their current monthly income. How is it different from a traditional investment account? In a traditional IRA, professionals invest money before paying the tax. Therefore, while redeeming the funds, you tend to pay tax on both the growth money and the money contributed by you. Professionals pay the tax at the income level when they started the contribution and not on the income level at the time of redemption. Whereas, you can make a contribution to a Roth account after clearing off all the taxes. That is after paying the income tax, you can start saving up in a Roth account. Therefore, the money grows tax-free in a Roth account. And, when you redeem the said amount from the Roth account it is tax-free. Both: the contribution amount and the growing amount will be redeemed tax-free.

2. This is the fundamental difference between a Roth V/S traditional investment retirement account. Now that you understand Roth accounts, let us jump onto the difference between Roth accounts. Roth 401 (K) V/S Roth IRA. Source: clark.com What is Roth 401 (K)? It is a sponsored retirement account. Similar to an employee provident fund account, the Roth 401 (K) account is sponsored by the employer. The employer opens this account for the employee. Usually, this is to encourage employees to save for their future and plan for retirement. However, the employee itself defer some of the money from the employer’s monthly income into the Roth 401 (K) account. The employee contribution towards a Roth 401 (K) account is matched in terms of percentage or a flat amount is directly deposited in the name of the employee. Usually, the option between Roth 401 (K) and traditional IRA is at the discretion of the employee. The employee has to choose between both of these options. Also, the employee should remember that selecting the Roth 401 (K) investment option will help in strategic tax planning and while redeeming the tax rate is lower in the case of Roth 401 (K) as compared to traditional IRA.

3. What is a Roth IRA? IRA is an abbreviated form of Individual Retirement Account.As the name suggests, IRA is an individual’s own contribution. An individual taxpayer can easily open an IRA with any banking and financial institution. Moreover, the amount deposited in an Individual Retirement Account is the tax-deducted amount. The employer deducts tax at the source and then transfers the salary in an individual’s salary account. Therefore, you can deposit any part of your salary in the Roth IRA account, with no tax deductions. Roth IRA V/S (401) K Income Limit Usually, Roth IRA is the one with the income limit. Therefore, if your income is above a certain level then you are not eligible to open a Roth IRA account. Updated Roth IRA limit for 2021 is: single filers have a limit of $140,000 Modified Adjusted Gross Income. Whereas, joint filers or family filers have a limit of $280,000 Modified Adjusted Gross Income. On the other hand, Roth 401 (K) does not have an upper cap on the income. Because, generally, the employer is the account holder of this account. Therefore, the income level of an individual does not matter in the case of Roth 401 (k). This difference allows high-income earners to go for Roth 401 (K) and enjoy more tax benefits.

4. Source: successfully unemployed.com Roth 401 (K) V/S Roth IRA Contribution Limit The maximum yearly contribution limit for Roth IRA has been set to $6000 yearly. Plus, if you are above the age of 50 you will get a catch-up contribution of $1000. Similarly, the contribution limit for Roth 401 (K) is $19,500. And, if you are above the age of 50, you can contribute more than $6,500 to your Roth 401 (K) account. This difference clearly makes Roth 401 (K) a favorable option. Moreover, it is a relatively newer retirement account option. Therefore, it has been set up by keeping investors preference as a priority.

5. Minimum Age Requirement Distribution There is a certain age limit for redeeming the account holder’s contribution in Roth accounts. However, there is a rule that if your age is more than 70 years then, you must begin redeeming your contribution year-on-year basis. Even if you do not need the money, you will have to withdraw from your contributions. However, there is a basic difference between both of these accounts. In the case of Roth IRA, you can stay invested for N number of years, there is no limitation on the number of years. And, you have freedom to withdraw, whenever you need funds. However, in the case of Roth 401 (K), the distributions are taken as per the RMD tables. Therefore, it is always better to take advice from a financial planner before redeeming any amount from these accounts. Early Withdrawal Scenarios Early withdrawal in case of Roth 401 (K) In this case, the early withdrawal depends on the option chosen by the employer. If your employer allows for an “in-service” function, then you can pre-withdraw the sum contributed under your name. The “in-service” has a condition, where you need to be an employee at the company. As per law you have access to your contribution account and you can pre-withdraw the amount without any penalty. Although, there are some specific set of rules you should know before withdrawing earnings. Therefore, you need to obey the rules. Also, the penalty is calculated on a pro-rata basis. And, thus for any withdrawal, you need to pay some penalty charges. Early withdrawal in case of Roth IRA In this case, you can withdraw your contributed capital from the account. But, you can also stay invested with the interest earned on it. Moreover, it will help you in growing your interest amount.

6. In short, while withdrawing your contributed capital you need to pay tax in the case of Roth 401 (K). Once you withdraw money from a Roth IRA, you will be released from this financial stress. Source: insuranceneighbor.com Frequently Asked Questions Can I transfer Roth 401 (K) to a Roth IRA? Yes, you can transfer your Roth 401 (K) to a Roth IRA. But, only after leaving the employer. A unique account number is assigned to you once you leave the employer. And, then you can transfer the account. Moreover, you can enjoy tax benefits by transferring Roth 401 (K) to Roth IRA. Do I need these accounts? In short, yes. If your income level matches the criteria then you can save up some money by investing in a Roth IRA. It will help you in growing funds for your post-retirement needs. Comparatively, retirement accounts are safer than any

7. other investment product. Therefore, if your employer does not guarantee a Roth 401 (K), then contributing to Roth IRA is beneficial. Can I open both of these accounts together? If you already have a Roth 401 (K), and your yearly income is as per the requirement. You can open a Roth IRA account. Conclusion Investment decisions always depend upon the financial goals of an individual. If an individual wants fixed income even after retirement. Then, contributing to a retirement account is beneficial. However, it is difficult to decide between Roth IRA and Roth 401 (K). Both these accounts have pros and cons, you just have to choose as per your financial goal. For more finance-related concepts you can have a look at the FinanceShed, and stay tuned for more updates. Contact Us : Website: https://financeshed.net Email Id: financeshedd@gmail.com To Connect With Us Visit