You have many ways to save for retirement using tax-favored accounts. Three of the most common are a traditional IRA, a Roth IRA, and a 401(k)-type qualified plan.
A traditional IRA is an account that holds assets for retirement. If you contribute to an IRA, you may be able to take a deduction for your contribution. You can only contribute a total of $6,500 in 2023 ($7,000 in 2024) to an IRA (whether traditional or Roth), with an additional $1,000 if you’re age 50 or older. These amounts can be different if you participate in a qualified plan at work. A traditional IRA gives you a tax deduction now, but taxable income later.
A Roth IRA is similar in some ways to a traditional IRA. It will hold your money until you need it for retirement. However, unlike the traditional IRA, the contributions are not deductible. On the other hand, the qualified distributions are not taxable. So, it is the inverse of the traditional IRA—no deduction now, but no taxable income later.
A 401(k) plan is a benefit that your employer can provide. Contributions are generally made pre-tax through payroll deferrals, and often the employer matches a portion of the contribution. The employer may offer a designated Roth 401(k) component that acts in a similar manner to a Roth IRA by allowing after-tax payroll deferrals. You can contribute up to $22,500 in 2023 ($23,000 in 2024) (whether pre-tax or designated Roth).
If you have questions about how much you can contribute and whether to use pre-tax or after-tax, call us so we can discuss your options.
In late 2022, Congress passed a legislative package that included a series of bills known as SECURE 2.0, providing incentives for U.S. workers to save for retirement and making it easier for small businesses to offer retirement plans.
The new law:
- Raises the age for starting required minimum distributions (RMDs) to 73 for 2023 (and 75 in 2033)
- Removes the requirement that owners of Employer Roth IRAs take RMDs beginning in 2024
- Reduces the penalties for account holders who fail to take the required RMDs
- Allows defined contribution retirement plans to add an emergency savings account
- Requires businesses that start new 401(k) and 403(b) retirement plans to automatically enroll eligible employees beginning in 2025
- Allows employers to match employee contributions to Roth IRAs