Choosing Between Retirement Accounts: Traditional IRA, Roth IRA And 401k (2024)

FAQs

Choosing Between Retirement Accounts: Traditional IRA, Roth IRA And 401k? ›

Traditional and Roth IRAs don't have employer sponsorship, so there is no employer match. On the other hand, almost all employers offering a 401(k) also offer matching contributions. Roth 401(k)s are not eligible for matching contributions; only traditional 401(k)s are.

The Bottom Line. In a 401(k) vs. Roth IRA matchup, a Roth IRA can be a better choice than a 401(k) retirement plan, as it typically offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.

If you think your tax rate will be lower when you begin taking withdrawals in retirement, traditional contributions may make sense. If your tax rate will be about the same (or higher), Roth contributions might be preferable.

The key difference between Roth and traditional individual retirement accounts (IRAs) lies in the timing of their tax advantages. With traditional IRAs, you deduct contributions now and pay taxes on withdrawals later; Roth IRA contributions are made with money that's been taxed, so you get tax-free withdrawals later.

It removes a certain amount of risk. In this case, if you split your retirement funds between a traditional 401(k) and a Roth 401(k), you would pay half the taxes now, at what should be the lower tax rate, and half when you retire, when rates could be either higher or lower.

If you don't have enough money to max out contributions to both accounts, experts recommend maxing out the Roth 401(k) first to receive the benefit of a full employer match.

With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a Traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½.

Roth IRAs do not have required minimum distributions (RMDs), meaning you can continue to benefit from tax-free potential growth throughout retirement without having to take money out. RMDs in 401(k)s and traditional IRAs require distributions beginning at age 73.

Contributions and earnings in a Roth 401(k) can be withdrawn without paying taxes and penalties if you are at least 59½ and had your account for at least five years. Withdrawals can be made without penalty if you become disabled or by a beneficiary after your death.

Tax diversification: High-income earners often find themselves in higher tax brackets. A Roth 401(k) account gives you more flexibility in managing your tax liability during retirement. Having a Roth account also allows you to be strategic about the tax treatment of your investment choices.

At what age does a Roth IRA not make sense? ›

Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circ*mstances. There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.

Fact: If you're eligible, you can contribute to different types of IRAs. Contributing to a Roth IRA and a traditional IRA is absolutely allowed as long as you're eligible.

The best funds to hold in your Roth IRA vs your other accounts are the most aggressive ones you'll hold in your portfolio because the growth on those will never be taxed. While you should consider holding more conservative assets like cash and CDs in your overall portfolio, they should not live in your Roth IRA.

Tax rate during retirement: If you expect your tax rate to be lower during retirement, a traditional IRA is more suitable because taxation is deferred until retirement. If you expect to be in a higher tax bracket during retirement, then choose a Roth IRA.

To make an educated choice between traditional and Roth deferrals, you want to consider your current tax situation and your anticipated situation in retirement. In general, you want to choose traditional deferrals if you expect your tax rate to decrease in retirement and Roth deferrals if you expect it to increase.

If you're transitioning to a new job or heading into retirement, rolling over your 401(k) to a Roth IRA can help you continue to save for retirement while letting any earnings grow tax-free. You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free.

Roth IRAs are not subject to RMDs during your lifetime. Then, if you need more income, you are generally better off taking from your traditional IRA first and leaving your Roth IRA funds to grow. Roth IRAs grow tax-free, so you want to give them the most time to keep growing.

While the Roth IRA is more accessible than a Roth solo 401k, it comes with a much lower contribution limit. In fact, a Roth solo 401k has a limit three times larger than a Roth IRA. The contribution limit for a Roth solo 401k is $22,500 ($30,000 if age 50+) for 2023 and $23,000 ($30,500 if age 50+) for 2024.

No. 401(k), 403(b), and Thrift Savings Plans (TSPs) aren't the same thing as an IRA. When we ask if you have a traditional or Roth IRA, don't answer Yes if you have a 401(k), 403(b), or TSP—unless you have an IRA in addition to any of these.

A Roth IRA can be a good savings option for those who expect to be in a higher tax bracket in the future, making tax-free withdrawals even more advantageous. However, there are income limitations to opening a Roth IRA, so not everyone will be eligible for this type of retirement account.