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
