Retirement Savings: Roth vs. Pre-tax Retirement Accounts
Planning for retirement is a fundamental aspect of financial well-being, and the choice between Roth and pre-tax retirement accounts can significantly impact your financial future. In this blog post, we'll explore the key differences between these two types of accounts, focusing on when you are taxed and the updated IRS contribution limits for 2024.
Here are some details on Roth retirement accounts:
General Tax Implications: Roth contributions are made with after-tax dollars, meaning there's no immediate reduction in taxable liability.
Withdrawals: Qualified withdrawals, including both contributions and earnings, are tax-free once you hit retirement (with certain restrictions).
Contributions: In 2024, the annual contribution limit for a 401(k) is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and older. For a Roth IRA, the annual contribution limit is $7,000 ($8,000 for those aged 50 and older) if you meet certain income requirements.
…and here are details about pre-tax retirement accounts:
General Tax Implications: Contributions to pre-tax retirement accounts, such as a Traditional 401(k) or Traditional IRA, are made with pre-tax dollars, providing an immediate tax deduction.
Withdrawals: Taxes are deferred until withdrawals are made in retirement, with withdrawals taxed as ordinary income.
Contributions: In 2024, the annual contribution limit for a Traditional 401(k) is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and older. Traditional IRA limits are $7,000 ($8,000 for those aged 50 and older). See more details on the contribution limits here.
One of the most common questions we get is “Should I be contributing to a Roth or a pre-tax account?” The answer is going to be depending on your situation, so here are some things to take into consideration when making this decision (and be sure to consult your tax professional for more advice!):
Tax Strategy: The choice between Roth and pre-tax accounts often depends on your current tax situation and future expectations. If you anticipate being in a higher tax bracket in retirement, a Roth account may be more advantageous.
Diversification: Some individuals choose to diversify their retirement savings by having both Roth and pre-tax accounts, offering flexibility in managing tax implications during retirement.
Employer Plans: Consider taking advantage of employer-offered 401(k) matches as this can provide valuable additional funds for retirement. Check with your employer plan as every plan is different to make sure you are maximizing your contributions! For example, some plans only provide a match on pre-tax contributions while others will match pre-tax and/OR Roth.
Selecting the right retirement account is a pivotal decision based on your financial circumstances and future goals. Understanding the tax implications and IRS contribution limits for Roth and pre-tax retirement accounts will help you make informed choices. Consider consulting with a financial advisor to create a personalized retirement plan aligned with your unique needs.
Disclaimer: This article is for informational purposes only. Please refer to the official government websites for the IRS the latest updates and contribution limits. Please consult your tax professional for guidance specific to your scenario.
