Retirement Tax Benefits: Traditional vs Roth Explained
Traditional vs Roth Explained
Retirement plans are essential for securing your financial future. So much information is need to make good decisions along the way, first you should know where you are financially and how much (if any) more saving and planning is needed for you to have what you want when you reach that stage of your life.
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Now let's get into this. There are two main types of retirement plans: Traditional Retirement Plans and Roth Retirement Plans. Understanding the differences between the two plans and their tax benefits is crucial for making informed decisions about your retirement savings.
Traditional Retirement Plans: Traditional retirement plans, such as a traditional 401(k) or traditional IRA, are pre-tax contributions. This means that contributions are made with pre-tax dollars and reduce your taxable income for the year you make the contribution. Taxes on the funds are paid when you withdraw the money in retirement, so you may call this your "I am taxed later account".
The current maximum contribution limit for a traditional 401(k) plan is $22,500 for individuals under age 50, and up to $30,000 for those over 50. The contribution limit for traditional IRAs is $6,500 for individuals under age 50, and $7,500 for those over 50.
Roth Retirement Plans: Roth retirement plans, such as a Roth 401(k) or Roth IRA, are after-tax contributions. This means that contributions are made with after-tax dollars, and you do not receive a tax deduction for the year you make the contribution. However, the money grows tax-free and qualified withdrawals in retirement are also tax-free, so you may call this your "I am taxed now account".
The current contribution limit for a Roth 401(k) plan is $22,500 for individuals under age 50, and up to $30,000 for those over 50. The contribution limit for Roth IRAs is $6,500 for individuals under age 50, and $7,500 for those over 50.
Income Limits: There are income limits for contributing to a Roth IRA, but no income limits for contributing to a Roth 401(k). For individuals who are single, the contribution limit phases out between $138,000 and up to $153,000 in adjusted gross income (AGI). For married couples filing jointly, the contribution limit phases out between $218,000 and $228,000 in AGI.
Conclusion: Both traditional and Roth retirement plans have their unique tax benefits and disadvantages. Understanding the tax implications of each plan and determining which plan is best for you depends on your individual financial situation, including your current tax bracket, expected retirement tax bracket, and overall financial goals. No matter which plan you choose, the most important step is to start saving for retirement as early as possible.
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Disclosure: The information provided in this article is for general educational purposes only and is not intended as financial or investment advice. This article does not take into account the specific financial objectives, circumstances, or needs of individual readers. Before making any decisions regarding your retirement savings, you should seek the advice of a financial advisor. The figures and contribution limits provided in this article are current as of 2023 and may be subject to change in the future. The author of this article does not guarantee the accuracy or completeness of the information provided and will not be held liable for any errors or omissions or any damages arising from its use.
Tax laws are complex and subject to change. The information presented is based on current interpretation of the laws. Neither Arlington Insurance Planning Services LLC nor Troy Barrow provide tax or legal advice. This publication is intended for informational purposes only and does not constitute legal or tax advice. This content is not intended to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code or any other applicable tax law. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances.