Retirement Savings

Let’s Talk Roth IRAs and Roth 401ks


s Americans, we have a veritable smorgasbord of retirement tools at our disposal, but none may better than the Roth IRA and Roth 401K. 

I’m a strong believer in the Roth options because they provide powerful tax benefits and want to discuss the many advantages of both the Roth IRA and Roth 401K products. 

The Roth IRA is an exceptional product. Unlike the traditional IRA, which is funded with pre-tax dollars and immediately reduces income taxes, contributions to a Roth IRA have no effect on your current year taxes. Although there is no tax relief in the year of contribution, there are never any taxes on withdrawals from a Roth IRA as long as you follow the rules. That is correct, no taxes at all. 

As a result, both Roth IRAs and Roth 401Ks offer compelling long-term wealth creation benefits. Although contributions to both Roth IRAs and Roth 401Ks are always made with after-tax dollars, there are two important differences. You are not eligible to contribute to a Roth IRA if you earn more than $140,000 as an individual or $206,000 as a married couple but there are no income restrictions for a Roth 401K. This is an extremely important point. Everyone can contribute to a Roth 401K, regardless of annual income.  

Another difference is that you can only invest $6,000 ($7,000 if over 50) in a Roth IRA each year but you can invest up to $19,500 ($26,000 if over 50) into a Roth 401K.  

The fact that anyone can contribute to a Roth 401k regardless of income is a significant advantage to those who would otherwise be closed out of a Roth IRA. Also, you can stash much more money away in a Roth 401K than you can in a Roth IRA.  As I mentioned above, in 2021, you can only invest $6,000 in a Roth IRA ($7,000 if over the age of 50) but you can invest $19,500 in a Roth 401K this year and a whopping $26,000 if you are over age 50.   

Wait, there’s more. As long as you meet income restrictions, you can invest in BOTH a Roth IRA and a Roth 401K each year, providing a large tax-advantaged savings opportunity. 

Thanks to the U.S. government the Roth IRA and Roth 401K are among the most advantageous saving vehicles for U.S. citizens and I urge you to consider their many powerful long-term benefits.

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