October 17, 2021
Image default
Business

What Is the Difference Between a 401(k) and Roth IRA Retirement Account? Business

Financial planning for retirement can feel like an overwhelming endeavor. There are so many different types of retirement accounts, and many people are unsure which would work best for them. Enlisting the help of a financial advisor Wyckoff NJ can make all the difference when it comes to understanding retirement plans and making sound decisions.

Learn more about the differences between two common types of retirement accounts.

401(k)

Perhaps the most common type of retirement account, the 401(k) is only offered through an employer. Money is taken out of an employee’s taxable income and put into a 401(k) account, and some employers match an employee’s contribution up to a certain percentage. The maximum amount of money one can contribute changes every couple of years per IRS regulations. In 2021, employees can contribute up to $19,500 per year if they are under 50 years old or up to $26,000 per year if they exceed 50 years of age.

Taxes are taken out when a 401(k) account owner withdraws funds, and fines can occur when one withdraws money before the age of 59 and a half.

Roth IRA

Only people who have an earned income are legally eligible to open a Roth IRA, and the contribution cannot be more than one earns. Those under 50 years old can contribute up to $6,000 per year into a Roth IRA, and those above 50 years old can contribute up to $7,000. The main benefit of opening a Roth IRA is that one only pays taxes on the funds that go into the account, not the accumulated funds that are withdrawn. This can result in thousands of dollars of tax savings over time.

There are pros and cons to both types of accounts, and many people opt for both to get the benefits of each one. No matter which type of account you decide to open, taking steps to plan for retirement is always a smart choice!