IRA, Roth IRA, or 401k? What Investors Should Know

“IRA, 401K & ROTH” Is written at blocks - Greenberg Financial Group
August 5, 2020

IRA, Roth IRA, or 401k? What Investors Should Know

Over nearly the last century, the S&P 500 has provided investors with an average annualized return of 10 percent. For many, stock investing can represent the easiest and most efficient path to wealth. But deciding which vehicle in which to place these assets can be a challenge. With multiple options at your disposal, each with its own tax consequences, how can you choose?

At Greenberg Financial Group, our array of financial services include 401k setup and review, IRAs, and portfolio advisory services. Learn more about the differences between traditional IRAs (tIRAs), Roth IRAs, and 401ks—as well as the different paths each will take you on the road to financial freedom.

Traditional IRA

A tIRA is an individual retirement account that is funded through pre-tax contributions. For practical purposes, this means you’ll contribute to the tIRA with your own funds, then deduct this contribution from your federal income tax return. This can reduce the amount of income subject to taxes and lower your overall tax bill. Depending on your top marginal tax rate, this could be anywhere from 10 to 37 percent of your total contribution back into your pocket.

The amount of your tIRA that is deductible will depend on your modified adjusted gross income (MAGI) for that year and whether you and/or your spouse were covered by a workplace retirement plan. For instance, a single person with a MAGI of $60,000 and who is covered by a retirement plan at work can fully deduct their IRA contributions. Once this person’s MAGI rises to more than $75,000, no deduction is available. However, if this person isn’t covered by a workplace retirement plan, they can fully deduct a retirement contribution no matter how high their MAGI is.

For 2020, individuals under age 50 can contribute up to $6,000 to a tIRA, while those age 50 and older can contribute up to $7,000.

Roth IRA

Like a tIRA, a Roth IRA is a portable retirement plan that anyone with earned income (or married to someone with earned income) can open. The primary difference between a tIRA and a Roth is the tax treatment of contributions and earnings. While a tIRA saves taxes upfront and collects them later (by taxing withdrawals and distributions), a Roth IRA taxes these funds on the front end and then allows you to withdraw contributions and earnings tax-free at retirement.

Roth IRAs are subject to the same income and contribution limits as tIRAs. For 2020, those under age 50 can contribute up to $6,000, with an extra $1,000 catch-up contribution for those age 50 and over. You don’t need to commit to one plan or another; so long as you fit within the income guidelines and don’t exceed the $6,000 (or $7,000) limit between the two accounts, you can contribute to both a tIRA and a Roth in the same tax year.

401k

A 401k is similar in tax treatment to a tIRA, but is offered through an employer and has a much higher maximum contribution limit—$19,500 for 2020, with an additional $6,500 available for those age 50 and over. The ability to contribute $26,000 per year to a retirement account (and deduct this amount from your taxable income) can be a major boon to anyone who needs to accelerate their retirement savings.

You can contribute to a 401(k) and a tIRA and/or a Roth IRA as long as you fall within the IRS’s income limits.

Which Plan(s) Are Right for You?

There’s no one-size-fits-all retirement plan, and personal finance is just that—personal. The right retirement plan(s) for you may shift over time and will depend on factors like your age, income, family size, employment horizon, and retirement plans. If your top marginal tax rate now is less than you’re expecting to pay in retirement, a Roth IRA can essentially allow you to prepay your retirement tax bill and withdraw tax-free money later. On the other hand, if you’d like to reduce your taxable income now and aren’t expecting to pay higher taxes in retirement, a tIRA or 401k can be a prudent choice. You may also opt to split your retirement contributions between pre-tax and post-tax to provide you with as many options as possible in retirement.

If you’d like to get started with a new retirement plan or just want some more information about your options, Greenberg Financial Group can help. Give us a call or visit our website to learn more about the services we offer.

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