No, I don’t mean David Lee Roth fighting 401,000 people, but that would definitely be the fight of the century.
What I’m talking about is the difference between two very distinct retirement savings accounts.
You’ve probably heard those names before, and if you don’t know what they mean, here’s the skinny:
A 401k is an employer-sponsored retirement savings plan.
In short, your employer automatically deducts a small amount from your paycheck into a savings account. Sometimes, they will even MATCH your contribution up to a certain amount.
Contributions into a 401k are not tax-free; they’re ‘taxed later,’ so you most certainly will be taxed on it when you decide to withdraw. As of 2021, you are allowed to contribute up to $19,500 of pre-taxed income to your 401k.
If you attempt to withdraw your money from the account before retirement, watch out. You will face taxation of your savings and withhold fees of up to 10%. So ask yourself – is it really worth taking it out early?
Another note: If you leave your job, you can transfer your 401k to another 401k or an IRA.
A Roth IRA is an Individual Retirement Account.
As the name suggests, this account’s opened by a person who contributes on their own instead of your employer setting it up for you.
As of 2021, Roth IRAs have a contribution limit of $6,000 per year, or $7,000 if you’re 50 years or older. Because contributions come from your taxed income, you won’t see the same kinds of fees upon withdrawal.
An obvious disadvantage is that since you’re contributing post-tax money, it’s a larger piece of your income now.
Of course, you can always have both running side by side if you want to maximize your savings – nothing is saying you can’t.
In fact, this may even be the smartest thing you can do!
If you are interested in:
- …opening either of these types of savings accounts and are not sure where to start…
- …getting my expert opinion on how to manage what you have now…
… give my office a shout at 513-563-PLAN (7526) or book 15 minutes in my calendar here and find out how we can help you make your retirement accounts work for you and minimize your tax burden for retirement.
