Roth vs. Traditional Retirement Savings Accounts (IRAs & 401(k)s)
Index - https://steemit.com/tax/@alhofmeister/56nc4n-tax-blog-index
Introduction
The purpose of this article is to cover the basics on retirement savings accounts (defined contribution plans). Around 1994, the amount of workers invested in defined contribution plans began to outnumber the amount invested in defined benefit plans (pensions). The shift is largely attributed to the expense and risk associated with pension plans.
IRA vs. 401(k)
The differences between a individual retirement account (IRA) and a 401(k)/403(b)/457 retirement plan are as follows:
Whereas the 401(k) plan is set up and maintained by the employer (insofar as they have the ability to set up the options for the employee to invest in), a IRA is set up and directed by the individual. Anyone can contribute to a IRA while only people employed by companies may contribute to a 401(k);
The contribution limit on a 401(k) is $18,000 ($24,000 if over 50) where the contribution limit on an IRA is $5,500 ($6,500 if over 50);
The ability to contribute to a 401(k) is available to an employee regardless of the employee's adjusted gross income. The contribution limits for an IRA begin to phase out at a certain income level (discussed below).
Contributions to a 401(k) must be made in the tax year to which they are applicable. Contributions to an IRA may be applied to the prior tax year if they are made before April 15.
Traditional vs. Roth
Several key differences between Roth and Traditional defined contribution plans are outlined below:
Contributions to a Traditional defined contribution plan are deductible for income tax purposes in the year made. Contributions to a Roth defined contribution plan are not deductible.
Distributions from a Roth defined contribution plan are not taxable assuming the other requirements for distribution are met (age, etc.). Distributions from a Traditional defined contribution plan are taxable in the year received (regardless of age).
The adjusted Gross Income (AGI) limitation on contributing to a Traditional IRA if a taxpayer is covered by a 401(k) is $72,000 - begins phasing out at $62,000 ($119,000 married - begins to phase out at $99,000). The AGI limitation on contributing to a Roth IRA if a taxpayer is covered by a 401(k) is $133,000 - begins phasing out at $118,000 ($196,000 married - begins to phase out at $186,000). Note that these limitations only apply when a taxpayer (or a taxpayer's spouse) are covered under a 401(k).
Only people under 70.5 are able to contribute to a Traditional IRA (not applicable to 401(k)s). There is no age restriction on contributing to a Roth IRA.
References
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
https://www.irs.gov/pub/irs-pdf/p590a.pdf
https://www.irs.gov/pub/irs-drop/n-17-64.pdf
Disclosure
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
@OriginalWorks