Roth IRA and 401K explained.

The biggest difference between a Roth IRA and a 401k is when you pay taxes.  If you think our tax bracket will be lower when you retire, a 401k is the way to go as you will pay less in taxes when you make a withdrawal.  If you think you may be in a higher tax bracket after retirement, a ROTH IRA is the smart choice.  This will have you paying taxes on your contribution at the lower tax bracket at the time of the contribution.  

With a Roth IRA, contributions are after-tax and the funds in the account can grow untaxed. One benefit of this is that at age 59 1/2, you can withdraw funds tax-free, as long as you have held the account for 5 years and have followed all the rules.  Another drawback to a ROTH IRA is that there are income limits to contributions.  Limiting contributions for 2020 starts at $124,000 for Singles and $196,000 for married filing jointly.  You cannot directly contribute anything to a ROTH IRA when your income reaches $139,000 for singles and $206,000 for married filing jointly.  In those cases, one can still do a backdoor ROTH IRA.  ROTH IRA has lower contribution limits than a 401k.  For 2020 the contribution limit for a ROTH IRA is $6,000.  Those 50 and over can contribute $7,000.  

For the year 2020, the contribution limits for a 401k is $19,500, $26,000 for those 50 and over.  Contributions to 401k use pre-tax funds which gives you a tax break right away.  You will pay taxes when you take withdrawals.   If you withdraw funds from a 401k before age 59 1/2, you will be subject to a 10% early withdrawal penalty.

Deciding between a ROTH IRA and a 401k really comes down to when it is going to be the smartest time for you to pay taxes on your income. Visit with your accountant, tax preparer, tax planner or financial advisor for the best advice for you and your tax situation.

Candace Stevens, CEO/President of

Number Cruncher LLC

cstevens@numbercruncherllc.tax

www.numbercruncherllc.tax