An integral part of any financial or investment plan is goal setting. The most common goal is retirement; sure, some people plan to work forever, but most would like to set their future selves up for a carefree retirement. Additionally, retirement planning and utilizing the different types of accounts play into another popular goal of minimizing tax liability. Below is a summary of some of the most common retirement accounts:
401k (Traditional and Roth)
One of the most, if not the most common retirement account is the 401k. This is an employer sponsored retirement account that allows employees to contribute a percentage or dollar amount of their salary, and many companies will also offer a match to your contribution. Often, these are used by higher earners as the 2023 income limit for a 401k is $305,000.
Key differences between Traditional and Roth 401k’s
Which of these is the “right” choice? If you read our previous Learn Article, you should know that there really is no such thing as just one right choice. There are several considerations:
Do you need the tax break now?
Do you expect to be in a lower tax bracket upon retirement ?
Can you invest the tax savings from a traditional 401k into a Roth IRA or taxable account?
It’s worth noting that this isn’t a zero-sum game. You can contribute to both a traditional and Roth 401k as long as you don’t exceed the contribution limit.
These accounts are also called tax-sheltered annuities, but they are very similar to a 401k plan. They are reserved exclusively for employees of non-profit/tax exempt organizations. This includes (but is not limited to): teachers, government employees, church employees and healthcare providers. The contribution limits for 2023 are the same for 403b plans as 401k plans and also offer catch up contributions for individuals 50 and older. However, they often offer fewer investment choices when compared to a 401k.
IRA (individual retirement account)
Unlike a 401k or 403b, an IRA is not employer sponsored and instead is an individual retirement account. The 2023 income limits for an IRA are considerably lower than the limits of a 401k. For a single filer, the limit is $153,000 and married filing jointly is $228,000. Like a 401k, there are pre-tax and after-tax accounts:
One major benefit of the Roth IRA is that there are no required minimum distributions, unlike the traditional IRA and both 401k options. In addition, there is what’s known as a Rollover IRA, where you move your money from a previous employer-sponsored retirement account (401k, 403b etc) into an individual retirement account. With a direct rollover, there will be no tax consequences.