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Roth IRA Roth IRA

Investing in your future is always a good idea, and there are lots of ways to do it. Whether you have a 401k plan through your employer or an individual retirement account (IRA), or both, there are a range of investment opportunities at your fingertips.

There are two types of retirement plans we discuss here – IRAs and 401ks. The type of retirement plan you choose depends partly on your eligibility to participate, but more so on how you choose to invest. There is no one-size-fits-all retirement plan or strategy.

What is an IRA?

IRA stands for individual retirement account. Rather than using a retirement plan through an employer, an individual works directly with an investment firm. Individuals investing in their own IRA can continuously add money to an account via a brokerageA brokerage firm hosts your brokerage account. They help you buy and sell financial investments/securities. Think companies like Fidelity and Charles Schwab. Many times they provide a range of financial planning and wealth management services. which is then used to purchase investments, like stocksRepresents a share of ownership in a corporation., mutual funds Buy shares or units of a pooled portfolio, where a professional manager invests money in a fund made up of many individual stocks., bondsRepresents money you loan to a bond issuer, like the government or a company. The bond issuer pays you interest regularly until they pay back the original debt amount when the bond matures. , etc.

Roth vs Traditional IRA

Roth IRA

With a Roth IRA, you make post-tax contributions to the plan so you cannot deduct your contributions to the plan on your taxes (because of that your money grows tax-free). If you follow the rules, then you can withdraw funds penalty-free when you are ready to retire. You can contribute to a Roth IRA after age 70 ½, unlike a traditional IRA.

There are limitations on who can participate in Roth IRAs. In general, those who can contribute, either up to the limit, a reduced amount, or nothing (zero), include the following:

Filing Status Adjusted Gross Income (AGI)
Single or
Head of household
$120,000 - $134,999
Greater than $135,000
filing jointly
$189,000 - $198,999
Greater than $199,000
filing separately
Less than $10,000
Greater than $10,000

Via the IRS

For more info on calculating your reduced amount, click here.

Traditional IRA Traditional IRA

Traditional IRA

With a traditional IRA, you contribute pre-tax money to the plan, and then pay taxes when you withdraw the funds in retirement. You can get a tax deduction for contributions with a traditional IRA. When you contribute pre-tax dollars, your taxable income is reduced by however much you contributed that year. So, say your salary is $50,000 and you contribute $10,000 to your IRA, then your taxable income would be $40,000 so you would owe less on your income taxes. In order to participate in an IRA, you must earn an income and be under the age of 70 ½.

Difference between Roth & IRA accounts

The main difference between a Roth IRA and a Traditional IRA is when the individual pays taxes on their retirement investments. Roth IRA taxes are paid prior to investing, whereas Traditional IRA taxes are paid when withdrawing funds after the investment has matured.

The decision between the two types of retirement accounts should be evaluated on a case-by-case scenario. Traditionally, people decide on a traditional IRA because they intend to make less money in retirement than when they are working. Therefore, the individual will have a lower taxable income and may even drop to a lower tax bracket in retirement. On the other hand, Roth IRAs take all uncertainty out of the equation. The biggest uncertainty is the tax rate. The tax rate might be higher or it might be lower when you retire. By paying pre-tax through a Roth IRA, the investor knows the exact tax rate they will pay on their retirement funds.

Is there a maximum you can contribute to a traditional or Roth IRA in a year?

For 2017 and 2018, the maximum you can contribute to a traditional or Roth IRA is $5,500. Those 50 years and older can contribute $1,000 extra each year, for a total of $6,500. However, if you choose to rollover contributions from a 401k into an IRA, the limit does not apply to those funds.

What is a 401k plan?

A 401k is a retirement savings plan sponsored by an employer, unlike an IRA. Employees can invest pre-tax dollars from their paychecks into the plan and withdraw the funds when they retire. Taxes are paid when the funds are withdrawn. Employers can match their employees’ contributions up to a certain percentage i.e. 50 cents on the dollar up to 3% of an employee’s contribution. Some plans/employers make new hires wait before they can enroll and begin contributing to the plan. Generally, a third party administrator (like Fidelity or Charles Schwab) will facilitate the transactions and manage plan performance, paperwork, etc.

In most cases, when you get a 401(k) through an employer that offers matching, employees must vest, meaning they must work for a certain amount of time before they are eligible to receive employer contributions. So it could be a few years before you start receiving employer match contributions. Whenever you decide to leave the company, you can take the money you’ve saved with you, by rolling it over to a personal IRA.

Difference between Roth & IRA accounts Difference between Roth & IRA accounts

Is there a maximum you can contribute to a 401k plan in a year?

There are annual maximum contribution limits for 401k plans. For 2018, you can defer up to $18,500 to a retirement savings account ($18,000 for 2017). For people 50 years old and older, the 2018 limit is $24,500 per year with catch-up contributions. Employer matching contributions do not count towards the maximum.

If you have multiple retirement plans, like a 401k plan through your employer and an IRA on your own, and you contribute to both regularly, the maximum you can contribute in a year for 2018 is $55,000 ($54,000 in 2017).

Is there a maximum you can contribute to a traditional or Roth IRA in a year? Is there a maximum you can contribute to a traditional or Roth IRA in a year?

What are “catch-up” contributions?

Catch up contributions are for those who have started contributing to a retirement savings account later in life and want to contribute more money over a shorter period of time in order to “catch-up.” The IRS allows for “catch-up” contributions so you can do just that. Individuals 50 and older can contribute additional money at the end of each calendar year. For 2018, the limit is $6,000 extra (on top of the $18,500 regular max contribution level) each year, for a total of $24,500 per year.

XcelHR offers a retirement plan for business owners who want to help their employees plan for the future. Find out more about XcelHR’s MEP plan here.

Is there a maximum you can contribute to a 401k plan in a year? Is there a maximum you can contribute to a 401k plan in a year?