What is a Roth 401(k)?
Some employers also give you access to a Roth 401(k), which you may use instead of or in combination with a traditional 401(k). This account requires you to pay taxes on the money as you put it in, but then you can make withdrawals tax-free during retirement. That may mean you’ll get a bigger tax bill now than if you opt for a traditional 401(k), but the trade-off could be more money in retirement. The combined contributions of your Roth and traditional 401(k) plans cannot exceed $19,500 (unless you’re 50 or over, in which case you can contribute an additional $6,500 each year).
What is an Individual Retirement Account (IRA)?
Like a 401(k), an IRA lets you make tax-deductible investments, which can help lower your next tax bill. “Deductions are limited based on how much you make and whether you’re contributing to an employer-sponsored plan,” says Derus. You can put in $6,000 a year before age 50 and $7,000 a year if you’re 50 or older. It’s a good option for those who are maxing out employer plans or wish to consolidate old plans.
What is a Roth IRA?
The Roth IRA is available to single filers earning less than $139,000 and joint filers earning less than $206,000. As with the Roth 401(k), you fork over tax on contributions and then make withdrawals tax-free during retirement. “A Roth IRA can make a lot of sense when you’re in your 20s and 30s,” says Coombes, because in the early years of your career you’re likely in a lower tax bracket than you’ll be in later. Avoid Roth plans if you expect your income to drop.
