Picking the Best Retirement Plan Option
- Funded with after-tax contributions
- Allow you to accumulate returns on your money tax-free
- Distribute money tax free without penalty as long as you are 59-1/2 and have held the account for at least 5 years*
- Roth 401k plans have no income limit for contributions.
- Roth 401k plans require withdrawals at 72 or when you retire, whichever comes later. There are no required withdrawals starting in 2024.
- If your employer allows it, you can borrow against your Roth 401k, up to $50,000 or 50% of your vested account balance, whichever is less.
- Roth IRAs have income limits for contributions and do not require withdrawals at any age.
- Unlike Roth 401k plans, Roth IRAs allow penalty and tax-free withdrawals of your contributions after a 5-year holding period.
- Even in single earner couples, contributions can be made to both spouse’s IRAs (must meet income limits for Roths).
- Hardship withdrawals without penalties exist for all types of retirement accounts. Hardships include buying a first house, paying for education expenses, paying for medical insurance after losing a job, etc. While penalties won’t apply, you will still owe ordinary income tax on traditional IRA or 401k accounts.
- Rule of 55 – you can withdraw funds from your current job’s 401k or 403b with no 10% tax penalty if you leave that job in or after the year you turn 55.
- Make an after-tax contribution to a traditional IRA.
- Roll the traditional IRA to a Roth IRA.
- If there are any earnings on the contributions made to the traditional IRA, taxes on the earnings will be owed after the rollover – an incentive to roll over quickly!
- If you also have a large traditional IRA, pro-rata taxes hurt this strategy, but there are workarounds.
- If your company plan offers after-tax contributions in addition to the more typical traditional and Roth contributions, you have additional opportunities to create Roth savings.
- This strategy creates Roth savings very quickly… as much as $43,500 per year.
- If you company makes matching contributions, they will reduce the amount of after-tax contributions you can make.
* We use the term 401k in this blog, but the concepts apply equally to 403b plans (provided by employers who are non-profit).
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