Retirement financial advice on retirement accounts such as 401 k plans, Traditional IRA plans and Roth IRA account should be reviewed differently. Each of those investment vehicles have different tax consequences and eligibility rules.
401k retirement plans, Traditional IRA plans and Roth IRA accounts each have different advantages depending upon your income level and your personal financial needs. Your income level will determine if you can use all of those investment types or some combination of them.
When giving retirement financial advice, your financial planner should break down the tax consequences and eligibility rules for you. We will do that for you so that when you meet with your financial planner, you will be prepared.
- Contributions to a Traditional IRA plan can be tax-deductible depending upon your income level and whether or not you are contributing to an employer’s plan.
- Your account grows tax-deferred.
- Withdrawals are taxed.
- It may be to your benefit to convert your Traditional IRA plan to a Roth IRA account.
- The advantages and disadvantages of converting to a Roth IRA depend upon your income level and your retirement target date.
- Talk with your financial planner and tax accountant about whether a conversion is the right financial move for you.
- To be eligible to contribute to a Traditional IRA you must be under age 70 1/2 by the end of the calendar year that you make your contributions.
- You must have taxable income in the year you make your contributions.
- Taxable income can be from wages, commissions, tips, bonuses.
- Taxable income cannot be from an inheritance.
- Contributions to your Roth IRA account are NOT tax-deductible.
- Withdrawals are tax-free, after age 59 1/2.
- You can contribute to a Roth IRA and your 401 k plans in the same year, you cannot do this with a Traditional IRA.
- To be eligible to contribute to a Roth IRA, your adjusted gross income must be under $120,000 if single and $176,000 if married.
401k Retirement Plans
- 401k contributions are tax-deductible because your taxable income is lowered by your contribution amounts.
- 401k contributions grow tax-deferred.
- 401k withdrawals at retirement are taxed.
- To be eligible to contribute to a 401k retirement plan you must be over the age of 21.
- Participate in the 401k retirement plan established at your employer.
- Meet the eligibility requirements established in your employers plan, which may include the requirement that you give the company a year of service before becoming eligible to participate in the plan.
Even though retirement plans were designed for the same purpose, to get you saving money for your retirement; they are designed differently when it comes to taxes and eligibility.
By learning the basic differences you will have an easier time deciding whether a traditional IRA or a Roth IRA or a 401k retirement investment will be the best investment vehicle to help you reach your retirement goals.