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401k vs Roth IRA: Which One is Right for You?

Posted by thallissey on Aug 6, 2015 12:05:58 PM

401k vs Roth IRA

As you begin to think about planning for your retirement, you’ll need to choose a retirement vehicle that is right for you. Since there are pros and cons to every savings plan, our chart provides an analysis of 401k vs Roth IRA.

A Benefits Analysis of 401k vs Roth IRA

401k vs Roth IRA

Did you know you can contribute up to $18,000 a year pre-tax to a 401k? Or that qualified distributions from a Roth IRA are not taxable? From tax benefits to contribution limits, there is much to learn about the advantages and disadvantages of different retirement vehicles. 401k vs Roth IRA? Our chart breaks down all the angles.

401k vs Roth IRA

Tax Benefit Within account, capital gains, dividends and interest incur with no tax liability. Within account, capital gains, dividends and interest incur with no tax liability.
Taxes Contributions are generally pre-tax, but they can be post-tax if allowed by your plan. Any distributions are taxed as ordinary income. All contributions are post-tax. As a result, qualified distributions are not taxable.
Contribution Limits In 2015, the employee contribution limit is $18,000 a year for those under 50. Anyone over age 50 can contribute $24,000 a year. For those age 49 or younger, the contribution limit is $5,500 a year. Above age 50 the contribution limit is currently $6,500.
Matching Contributions Some employers offer matching contributions. Matching contributions are unavailable.
Deduction Limits There is normally no limit on the amount of deductible income, but HCE (highly compensated employees) rules may apply. Earnings are tax-exempt on contributions for people with incomes up to $193,000, depending on their tax filing status.
Distributions Distributions can begin at age 59 ½ or in the event of a disability. Distributions can begin at age 59 ½ or in the event of a disability.
Employer or Individual An employer or sole proprietor must set up the plan. An individual must set up this plan.
Forced Distributions The owner must start withdrawing funds at age 70 ½ unless that person is still employed. Otherwise, they will receive a penalty of 50% of minimum distribution. None
Early Withdrawal The 401k owner typically incurs a 10% penalty fee plus taxes. Principal of contributions and seasoned conversions can be withdrawn without tax or penalty at any time. Any additional amounts are subject to income taxes and a 10% penalty fee.
Conversions and Rollovers A 401k can be rolled over into an IRA or a Roth IRA at the termination of employment. N/A


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Topics: Financial Planning, retirement, investment