Retirement Plan Options

401K

IRA (Individual Retirement Account)

Traditional

Roth

What are they?

A 401(k) is a qualified employer-sponsored retirement plan. If your employer offers access to a 401K + company matching, that can be a great place to start.

While a 401K is limited to people employed by companies that offer those plans, anyone can contribute to a traditional IRA as long as they are under the age of 70 ½. A traditional IRA offers tax-deferred growth on your investment, allowing all of your money to grow until you are ready to withdraw.

A Roth IRA offers the opposite tax benefit from a traditional IRA. You pay income tax as you deposit the money, but then pay no tax when you withdraw in retirement.

A Roth IRA is income-restricted, so you may only contribute if you make less than $135,000 for single filers and $199,000 for married couples filing jointly.

2018 Contribution Limit* updated per year

$18,500 for those under age 50; $24,500 for those ages 50+

$5,500 as a combined IRA limit; $6,500 ages 50+

Taxation

Contributions are made with before-tax dollars

Withdrawals (in Retirement) are subject to Federal and most State income taxes

Contributions are made with after-tax dollars

Withdrawals are not taxed, provided it’s a qualified distribution:

• First time home purchase
• On account of disability
• On or after death
• On or after age 59 ½

Advantages

• Simplicity. All of your retirement savings in one place.
• Employer match (if offered)
• Eligibility is not limited by income
• High annual Contribution limit

• Greater investment Selection
• Not limited by where you work

• Greater investment Selection
• Qualified withdrawals are tax free in retirement
• Money can be withdrawn at any time

Disadvantages

• No control over plan and investments choices
• Distributions in retirement are taxed as ordinary income, unless in a Roth 401K
• Required distributions begin at age 70 ½

• Limits are less than 401K
• Distributions in retirement are taxed as ordinary income
• Required distributions begin at age 70 ½

• Limits are less than 401K
• No immediate tax benefit for contributing
• Income-restricted, the ability to contribute caps out at higher incomes.

Next Steps

Set up a 401K account if your employer offers it with matching contributions (and meet the matching at the minimum at least). Otherwise, start with an IRA to have the most investment flexibility. If you max out the IRA limit and still have access to a 401K (but without matching) contribute as much as you can at that time for the pre-tax benefit it offers.

Sources: Nerd Wallet | Daily Worth | USA Today | IRS.gov