Investing for Retirement with 401(k)s and IRAs
When investing for retirement, two common types of accounts are part of the planning: 401(k)s and IRAs. A 401(k) is an employer-sponsored plan that lets you contribute some of your paychecks to save for retirement.
A potential benefit of a 401(k) is that your employer may match your contributions to your account up to a certain point. If this is available to you, then a good goal is to contribute at least enough to receive the maximum matching contribution your employer offers. An IRA is an account you usually open on your own. As far as these accounts are concerned, the key is knowing the various benefits and limitations of each type. Remember that you may be able to have more than one type of account.
Two Types of IRAs and 401(k)s
IRAs and 401(k)s can come in two main types – traditional and Roth – with significant differences. However, both let you to delay paying taxes on any investment growth or income, while your money is in the account.
Traditional IRAs and 401(k)s
Your contributions to traditional or “pretax” 401(k)s are automatically excluded from your taxable income, while contributions to traditional IRAs may be tax-deductible. For an IRA, it means that you may be able to deduct your contributions from your income for tax purposes. This may decrease your taxes. Even if you aren’t eligible for a tax-deduction, you are still allowed to make a contribution to a traditional IRA, as long as you have earned income. When you withdraw money from traditional IRAs or 401(k)s, distributions are generally taxed as ordinary income.
Roth IRAs and 401(k)s
With Roth IRAs and Roth 401(k)s, you contribute after-tax dollars, and the withdrawals you take are tax-free, provided that they’re a return of contributions or “qualified distributions” as defined by the IRS. For Roth IRAs, your income may limit the amount you can contribute, or whether you can contribute at all.
If a Roth 401(k) is offered by your employer, a big benefit is that your ability to contribute typically isn’t phased out when your income reaches a certain level. 401(k) plans have higher annual IRS contribution limits than traditional and Roth IRAs. You should speak to an Estate Planning Attorney to assist you in what is best for you situation.
When investing for retirement, you may be able to use both a 401(k) and an IRA with both Roth and traditional account types. Note that there are some exceptions to the rule that withdrawals from IRAs and 401(k)s before age 59½ typically trigger an additional 10% early withdrawal tax.
Estate Planning Attorneys Can Help
If you don’t know where to start in your retirement investing, reach out to one of our estate planning attorneys. They will help you get the documents you need in place, and they can continue to help you plan for your future with estate planning assistance. It’s an easy process that normally doesn’t take longer than 10 days from when you first meet. Plan for your future and protect your legacy and family.