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 $6,000 in 2020 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 $19,500 in 2020 (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.