Mere chump change, right?
So when you decide how to allocate your retirement dollars, you have to make tough choices.
Is Your Bank Holding You Back?
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Thesesmart movescould help you reach your next big savings goal.
What Is a Roth IRA?
ARoth IRAis a pop in of individual retirement account.
What Is a 401(k)?
You cant open a 401(k) on your own.
Unlike a Roth IRA, a traditional 401(k) is tax-deferred.
Whatever the amount, its basically free money to pad your retirement savings.
Now lets see how they compare across six categories.
Here are the requirements.
A salary, wages, tips, bonuses, and freelance and self-employment income all count.
If youre married but dont work, your spouse can also set up a spousal Roth IRA for you.
(Well get to the contribution limits next.)
Unlike a Roth IRA, a 401(k) has no income limits.
How Much Can You Contribute?
In 2023, these limits were $6,500 and $7,500, respectively.
The limits are the same for traditional IRAs.
Can You Survive 10 Days of Budgeting?
If you should probably wrangle your budget, it may be time to consider a savings challenge.
How Do the Tax Breaks Compare?
Taxes are a major factor when youre considering a Roth IRA vs. 401(k).
Here are some key differences in how the accounts are taxed.
If you were hoping to beef up your tax refund, a Roth IRA will leave you disappointed.
Suppose you earn $50,000 and contribute $5,000 to a traditional 401(k).
Your taxable income for the year is now $45,000.
How Do You Invest?
you could open a Roth IRA through a brokerage firm or a robo-investing service.
If you prefer to choose your own investments, youll want to open a brokerage account.
Consult with a financial adviser if you arent sure what investments to choose.
you’re able to set up automatic transfers from your bank to make investing more convenient.
you’re able to change the amount youre contributing and your investment allocations at any time.
When Can You Withdraw Your Money?
That can make a Roth IRA a good safety net in case of an emergency.
Early 401(k) withdrawals usually come with a 10% penalty, along with income taxes.
Do You Have to Take Distributions?
Arequired minimum distribution, or RMD, is IRS lingo for when youre required to withdraw money.
We know it sounds weird that youre required to withdraw your own money.
The government wants to check that it gets its cut.
After you die, however, your beneficiaries will probably have to take RMDs on the account.
The IRS typically requires that you take distributions beginning at age 73.
But if youre still working, you may not have to.
The exact amount depends on your account balance and life expectancy.
But lets review the basic pros and cons of a Roth IRA.
Maybe youre scrambling after your car broke down.
Or you got a medical bill you werent expecting.
Or inflation has finally pushed your budget over the edge.
You dont need to go it alone.
When money is tight,these resourcescan help you manage unexpected expenses without stress.
Which Retirement Account Is Right for You?
If your employer offers a 401(k) and offers a match of any kind, your No.
1 priority should be to contribute enough to max out your employer match.
Otherwise, youre missing out on free money.
And watch that money grow.
Robin Hartill is a senior editor at The Penny Hoarder.
