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{{short description|Comparison of US retirement options}} |
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{{Unreferenced||Feb 2007|date=February 2007}} |
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This is a comparison between [[401(k)]], [[Roth 401(k)]], and [[Traditional IRA|Traditional Individual Retirement Account]] and [[Roth IRA|Roth Individual Retirement Account]] accounts, four different types of retirement savings vehicles that are common in the [[United States]]. |
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{{Mergeto|Individual Retirement Account|date=February 2007}} |
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==Summary== |
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===Roth vs. Traditional=== |
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If the investor is at lower tax bracket now than expected retirement bracket, then Roth 401k/IRA is generally preferred. If the investor is at a higher tax bracket now than expected retirement bracket, then a traditional 401k/IRA is preferred. However, the Roth versions also have early/late withdrawal advantages, as seen below. |
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===401k vs. IRA=== |
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It is usually best to fund a 401k plan offered by one's employer up to the maximum matched contribution. After that, it is advantageous for the investor to fund a IRA due to more flexibility in investment choices. However, contributing more to a 401k is simpler and may be preferred as an easy choice for investors seeking an easy option for investing. |
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==Comparison== |
==Comparison== |
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{| class="wikitable" |
{| class="wikitable" |
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|-agi |
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! width=4%|Tax Year 2024 |
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! width=24%|(Traditional) [[401(k)]]<ref name=Pub4530>{{cite web |work=Internal Revenue Service |title=Publication 4530: Designated Roth Accounts Under a 401(k) or 403(b) Plan |url=https://www.irs.gov/pub/irs-pdf/p4530.pdf |date=August 2009 |access-date=2017-08-10 |archive-date=2017-09-30 |archive-url=https://web.archive.org/web/20170930144224/https://www.irs.gov/pub/irs-pdf/p4530.pdf |url-status=live }}</ref><ref name=IRSarticle>{{cite web |work=Internal Revenue Service |title=Designated Roth Accounts in 401(k) or 403(b) Plans |date=October 16, 2009 |url=https://www.irs.gov/retirement/article/0,,id=156204,00.html |access-date=August 10, 2017 |archive-date=June 22, 2012 |archive-url=https://web.archive.org/web/20120622074455/http://www.irs.gov/retirement/article/0,,id=156204,00.html |url-status=live }}</ref><ref name=IRScomparison>{{cite web |work=Internal Revenue Service |title=Comparison of Roth 401(k), Roth IRA, and Traditional 401(k) Retirement Accounts |url=https://www.irs.gov/pub/irs-tege/roth_chart.pdf |access-date=2017-08-10 |archive-date=2010-05-31 |archive-url=https://web.archive.org/web/20100531043425/http://www.irs.gov/pub/irs-tege/roth_chart.pdf |url-status=live }}</ref> |
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! width=24%|[[Roth 401(k)]]<ref name=Pub4530/><ref name=IRSarticle/><ref name=IRScomparison/> |
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! width=24%|[[Traditional IRA]]<ref name=Pub4530/><ref name=IRSarticle/><ref name=IRScomparison/> |
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! width=24%|[[Roth IRA]]<ref name=Pub4530/><ref name=IRSarticle/><ref name=IRScomparison/> |
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|- |
|- |
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! Tax benefit |
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! style="background:silver"|Tax Year 2007 |
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| colspan="4" align="center"| Capital gains, dividends, and interest within account incur no tax liability. |
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! style="background:silver" width="250pt"|[[401(k)]] |
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! style="background:silver" width="250pt"|[[Roth 401(k)]] |
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! style="background:silver" width="250pt"|[[Traditional IRA]] |
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! style="background:silver" width="250pt"|[[Roth IRA]] |
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|- |
|- |
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!Subjected taxes |
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| style="background:silver"|Tax Implications |
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| Contributions are usually [[Above the line deduction|pre-tax]]; but can also be post-tax, if allowed by plan. Distributions are taxed as [[ordinary income]] (except any post-tax principal). |
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| Money is deposited as "tax deferred" and then taxed at normal income bracket for distributions |
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| Contributions are [[taxable income|post-tax]]. Qualified distributions are not taxable. |
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| Income is post tax money and no taxes have to paid under normal distributions |
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| |
| Contributions are [[tax deduction|deductible]] (subject to conditions). When deducted, contributions are pre-tax, otherwise, they are post-tax. Distributions are taxed as ordinary income (except any non-deducted principal). |
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| Contributions are post-tax. Qualified distributions are not taxable. |
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| Income is post tax money and no taxes have to paid under normal distributions |
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|- |
|- |
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!Employer or Individual |
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| style="background:silver"|Income Limits |
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| colspan="2" align="center"| Employer or [[sole proprietorship|sole proprietor]] sets up this plan. |
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| Generally none, but somewhat complicated due to HCE (highly compensated employees) rules |
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| colspan="2" align="center"|Individual sets up this plan. |
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| Generally none, but somewhat complicated due to HCE (highly compensated employees) rules |
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| Based upon MAGI; Single, HoH, MFS: full contrib to $52k, partial to $62k; MFJ; QW: full contrib to $83k, partial to $103k; can't contribute more than you make in that year |
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| Based upon MAGI; Single: full contrib up to $95k, partial contrib to $114k; Married: full contrib up to $156k, partial contrib to $166k; can't contribute more than you make in that year |
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|- |
|- |
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!Contribution Limits |
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| colspan="2" align="center"| Employee contribution limit of $23,000/yr for under 50; $30,500/yr for age 50 or above in 2024; limits are a total of pre-tax Traditional 401(k) and Roth 401(k) contributions.<ref>{{cite web|title=401(k) limit increases to $23,000 for 2024, IRA limit rises to $6,500|url=https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000}}</ref> Total employee (including after-tax Traditional 401(k)) and employer combined contributions must be lesser of 100% of employee's salary or $69,000 ($76,500 for age 50 or above).<ref>{{cite web|url=https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits |title=Retirement topics: 401(k) and profit-sharing plan contribution limits | Internal Revenue Service }}</ref> There is no income cap for this investment class. |
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| $15.5k/yr for under 50, $20.5k/yr for 50 and over in 2007; limits are a total of trad 401k and Roth 401k contributions. Employee and employer combined contributions must be lesser of 100% of employee's salary or $45k. |
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| colspan="2" align="center"|$7,000/yr for age 49 or below; $8,000/yr for age 50 or above in 2024; limits are total for traditional IRA and Roth IRA contributions combined. Cannot contribute more than annual earned income. For direct contributions to Roth IRAs, contribution limit is reduced in a "phase-out" range, for single MAGI > $146,000 and joint MAGI > $228,000<ref>{{cite web|title=401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000|url=https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000}}</ref> (For this purpose, however, MAGI excludes any Roth conversions.<ref>{{Cite web|url=https://taxmap.irs.gov/taxmap/pub17/p17-089.htm#TXMP43c02f18|title=Publication 17 – Your Federal Income Tax (For Individuals) – Roth IRAs|website=taxmap.irs.gov|access-date=2020-08-30}}</ref>) Contribution limit does not apply to conversions from traditional IRA (or qualified employer plans) to Roth IRA. |
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| $15.5k/yr for under 50, $20.5k/yr for 50 and over in 2007; limits are a total of trad 401k and Roth 401k contributions. Employee and employer combined contributions must be lesser of 100% of employee's salary or $45k. |
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| $4k/yr for age 49 or below; $5k/yr for age 50 or above in 2007; limits are total for trad IRA and Roth IRA contributions combined |
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| $4k/yr for age 49 or below; $5k/yr for age 50 or above in 2007; limits are total for trad IRA and Roth IRA contributions combined |
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|- |
|- |
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!Contribution notes |
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| style="background:silver"|Employer or Individual |
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| |
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| Employer sets up this plan |
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|Effective limit is higher than traditional 401(k) as the contributions are post-tax. |
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| Employer sets up this plan |
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| |
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| Individual sets up this plan |
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|Effective limit is higher than traditional IRA as the contributions are post-tax. |
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| Individual sets up this plan |
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|- |
|- |
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!Matching Contributions |
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| Matching contributions available from employers. |
| Matching contributions available from some employers. |
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| Matching contributions available through employers, but they must sit in a pretax account |
| Matching contributions available through some employers, but they must sit in a pretax account.<ref>{{Cite web |url=https://www.irs.gov/retirement/article/0,,id=152956,00.html#10 |title=Retirement Plans FAQs on Designated Roth Accounts |access-date=2017-08-10 |archive-date=2012-08-10 |archive-url=https://web.archive.org/web/20120810080210/http://www.irs.gov/retirement/article/0,,id=152956,00.html#10 |url-status=live }}</ref> |
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| No matching contributions available |
| colspan="2" align="center"| No matching contributions available. |
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| No matching contributions available |
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|- |
|- |
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!Deduction Limits |
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| style="background:silver"|Distributions |
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| colspan="2" align="center"| Generally no limit on the amount deductible from income, but somewhat complicated due to [[401(k)#Highly compensated employees (HCE)|HCE]] (highly compensated employees) rules. |
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| Distributions can begin at age 59 1/2 or owner becomes disabled |
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| Full deduction available on incomes up to $198,000, depending on [[Filing Status (federal income tax)|tax filing status]]. See [[Traditional IRA#Income limits|full rules]]. |
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| Distributions can begin at age 59 1/2 and the account has been open for at least 5 years; there are exceptions though |
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| Tax-exempt earnings on contributions available up to incomes of $208,000, depending on tax filing status. See [[Roth IRA#Income limits|full rules]] and [[Roth IRA#Traditional IRA conversion as a workaround to Roth IRA income limits|Backdoor Roth IRA Contributions]]. |
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| Distributions can begin at age 59 1/2 or owner becomes disabled |
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| Distributions can begin at age 59 1/2 as long as contributions are "seasoned" (been in the account for at least 5 years or owner becomes disabled |
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|- |
|- |
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! |
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| style="background:silver"|Forced Distributions |
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!(Traditional) [[401(k)]] |
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| Must start withdrawing funds at age 70 1/2 unless employee is still employed. Penalty is 50% of minimum distribution. |
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![[Roth 401(k)]] |
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| Must start withdrawing funds at age 70 1/2 unless employee is still employed. Penalty is 50% of minimum distribution. |
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![[Traditional IRA]] |
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| Must start withdrawing funds at age 70 1/2 unless employee is still employed. Penalty is 50% of minimum distribution. |
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![[Roth IRA]] |
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|- |
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!Distributions |
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| Distributions can begin at age 59½ or if owner becomes disabled. |
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| Distributions can begin at age 59½ and the account has been open for at least 5 years, or if owner becomes disabled, with some exceptions. |
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| Distributions can begin at age 59½ or if owner becomes disabled. |
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| Distributions can begin at age 59½ as long as contributions are "seasoned" (5 years from January 1 of the year the first contribution was made) or owner becomes disabled. |
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|- |
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!Forced Distributions |
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| colspan="2" align="center"| Must start withdrawing funds at age 72 unless employee is still employed with employer setting up the 401(k), and not a 5% owner. Penalty is 50% of minimum distribution. |
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| Must start withdrawing funds at age 72. Penalty is 50% of minimum distribution. |
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| None. |
| None. |
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|- |
|- |
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!Loans |
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| style="background:silver"|Contribution Withdrawal |
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| |
| colspan="2" align="center"| When still employed with employer setting up the 401(k), loans may be available depending upon the plan, not more than 50% of balance or $50,000. |
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| colspan="2" align="center"| No |
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| Yes, tax and penalty free, as long as the account has been open for more than 5 years |
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| No |
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| At any point, the owner may withdraw the total contributed into the IRA |
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|- |
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!Early Withdrawal |
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| Generally no when still employed with employer setting up the 401(k). Otherwise, 10% penalty plus taxes. There are some exceptions to this penalty.<ref>{{cite web |title=Topic 424 – 401(k) Plans |work=IRS.gov Tax Topics |date=February 5, 2011 |url=https://www.irs.gov/taxtopics/tc424.html |access-date=August 10, 2017 |archive-date=July 3, 2017 |archive-url=https://web.archive.org/web/20170703132618/https://www.irs.gov/taxtopics/tc424.html |url-status=live }}</ref> |
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| 10% penalty plus taxes including withdrawal for hardships |
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| Generally no when still employed with employer setting up the 401(k). Otherwise, taxes on the earnings, plus 10% penalty on taxable part of distribution and taxable part of unseasoned conversions. There are some exceptions to this penalty. |
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| ??? |
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| 10% penalty plus taxes for distributions before age 59 |
| 10% penalty plus taxes for distributions before age 59½ with exceptions. |
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| |
| Principal of contributions and seasoned conversions can be withdrawn at any time without tax or penalty. Additional amounts are subject to normal income taxes and 10% penalty if not qualified distributions. |
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|- |
|- |
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!Home Down Payment |
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| Purchase of primary residence and avoidance of foreclosure or eviction of primary residence, subject to 10% penalty, if hardship withdrawals are available in the plan.<ref name="IRS 575">{{cite web|title=Publication 575 (2010), Pension and Annuity Income|work=IRS.gov Tax Topics|date=February 5, 2011|url=https://www.irs.gov/publications/p575/ar02.html#en_US_2010_publink1000226952|access-date=August 10, 2017|archive-date=May 2, 2017|archive-url=https://web.archive.org/web/20170502061559/https://www.irs.gov/publications/p575/ar02.html#en_US_2010_publink1000226952|url-status=live}}</ref> |
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| Purchase of primary residence and avoidance of foreclosure or eviction of primary residence is subject to 10% penalty. |
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| rowspan="3" align="center" | If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59 ½. |
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| ??? |
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| Can withdraw up to $ |
| Can withdraw up to $10,000 for a first time home purchase down payment with stipulations. |
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| Up to $ |
| Up to $10,000 can be used for primary home down payment. Must have held Roth IRA for a minimum of 5 years. Must not have owned a home in previous 24 months. House must be owned by IRA owner or direct linear ancestors or descendants. |
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|- |
|- |
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!Education Expenses |
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| Payment of secondary |
| Payment of secondary educational expenses in last 12 months for employee, spouse, or dependents, subject to 10% penalty, if hardship withdrawals are available in the plan.<ref name="IRS 575"/> |
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| colspan="2" align="center"| Can withdraw for qualified higher education expenses of owner, children, and grandchildren. |
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| ??? |
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| Can withdraw for qualified education expenses of owner, children, and grandchildren |
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| Can withdraw for qualified education expenses of owner, children, and grandchildren |
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|- |
|- |
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!Medical Expenses |
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| Medical expenses not covered by insurance for employee, spouse, or dependents subject to 10% penalty |
| Medical expenses not covered by insurance for employee, spouse, or dependents, subject to 10% penalty, if hardship withdrawals are available in the plan. Medical expenses in excess of 7.5% of your adjusted gross income may be exempt to the 10% penalty.<ref name="IRS 575"/> |
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| colspan="2" align="center"| Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability. |
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| ??? |
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| Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability |
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| Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability |
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|- |
|- |
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! |
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| style="background:silver"|Conversions |
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!(Traditional) [[401(k)]] |
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| ??? |
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![[Roth 401(k)]] |
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| Cannot be converted to a trad 401k, but upon termination of employment, can be rolled into Roth IRA |
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![[Traditional IRA]] |
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| Can be converted to a Roth IRA. Taxes need to be paid during the year of the conversion. Other limitations though. |
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![[Roth IRA]] |
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| ??? |
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|- |
|- |
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!Conversions and Rollovers |
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| style="background:silver"|Changing Institutions |
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| Upon termination of employment (or in some plans, even while in service), can be rolled to IRA or Roth IRA. When rolled to a Roth IRA, taxes need to be paid during the year of the conversion. |
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| Can roll over to another employer's 401k plan or to an (traditional?) IRA at an indepenent institution. |
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| Cannot be converted to a traditional 401(k), but upon termination of employment (or in some plans, even while in service), can be rolled into Roth IRA. |
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| ??? |
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| Can be converted to a Roth IRA, typically for [[Roth IRA#Traditional IRA conversion as a workaround to Roth IRA income limits|backdoor Roth IRA contributions]]. Taxes need to be paid during the year of the conversion. Also, the non-basis portion can be rolled over into a 401(k), if allowed by the 401(k) plan. |
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| Funds can be either transferred to another institution or they can be sent to the owner of the trad IRA who has 60 days to put the money in another institution in a rollover contribution to another traditional IRA |
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| |
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| ??? |
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|- |
|- |
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!Changing Institutions |
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| style="background:silver"|Inside The Account |
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| Can roll over to another employer's 401(k) plan or to a rollover IRA at an independent institution. |
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| Capital gains, dividends, and interest within account incur no tax liability |
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| Can roll over to another employer's Roth 401(k) plan or to a Roth IRA at an independent institution. |
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| Capital gains, dividends, and interest within account incur no tax liability |
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| colspan="2" | Funds can be either transferred to another institution or they can be sent to the owner of the traditional IRA who has 60 days to put the money in another institution in a rollover contribution to another traditional IRA.<ref name="IRS590">{{cite web | title = Publication 590: Individual Retirement Arrangements (IRAs) | date = January 7, 2010 | work = Internal Revenue Service | url = https://www.irs.gov/pub/irs-pdf/p590.pdf | access-date = August 10, 2017 | archive-date = January 5, 2010 | archive-url = https://web.archive.org/web/20100105205325/https://www.irs.gov/pub/irs-pdf/p590.pdf | url-status = live }}</ref> |
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| Capital gains, dividends, and interest within account incur no tax liability |
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| Capital gains, dividends, and interest within account incur no tax liability |
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|- |
|- |
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!Beneficiaries |
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| ??? |
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| colspan="2" align="center"| For married persons, federal law dictates that the beneficiary of any form of 401(k) automatically be the surviving spouse. A different party may be named beneficiary, however, provided the surviving-spouse-to-be has consented and the consent is in written form. For single persons, any party may be named beneficiary; however, if no beneficiary is named, then it defaults to the decedent's estate. |
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| ??? |
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| colspan="2" | When owner dies, spouse as beneficiary can roll both accounts into one IRA account. Other beneficiaries will be subject to forced distributions (taxable) over a ten-year period. Beneficiaries will not pay estate tax if the inheritance is under the exemption amount. |
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| ??? |
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| When owner dies, spouse is sole beneficiary and can roll both accounts into one Roth IRA account. |
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|- |
|- |
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!Protection |
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| style="background:silver"|Other |
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| colspan="2" align="center"| Account is protected from bankruptcy and creditors (with limited exceptions, e.g. IRS). |
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| ??? |
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| colspan="2" align="center"| Account is protected from bankruptcy up to $1,362,800.<ref>{{cite news|url=https://www.kiplinger.com/article/retirement/t047-c000-s004-protecting-retirement-accounts-from-creditors.html|title=Protecting Retirement Accounts from Creditors|publisher=[[Kiplinger]]|date=September 3, 2019|last=Sheedy|first=Rachel|access-date=February 21, 2021|archive-date=January 27, 2021|archive-url=https://web.archive.org/web/20210127065648/https://www.kiplinger.com/article/retirement/t047-c000-s004-protecting-retirement-accounts-from-creditors.html|url-status=live}}</ref> Protection from creditors varies by state (from none to full protection). |
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| Seldom offered by employers since it was implemented in early 2006 |
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|- |
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| ??? |
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! |
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| ??? |
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!(Traditional) [[401(k)]] |
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![[Roth 401(k)]] |
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![[Traditional IRA]] |
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![[Roth IRA]] |
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|} |
|} |
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<!-- |
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==Sources== |
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DO NOT RESTORE THIS SECTION WITHOUT ADDING MULTIPLE VERIFIABLE, RELIABLE SOURCES! and get rid of the "you"s: this is an encyclopedia, not a financial advice blog! |
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The majority of the information in this matrix was gathered from the linked articles in the column headers. |
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==Roth vs. Traditional== |
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The decision between choosing a Roth IRA vs. a Traditional IRA depends mostly on whether you are likely to be in a higher [[tax rate]] in the future (in which case a Roth IRA is better) or a lower tax rate in the future (in which case a conventional IRA is better). Roth IRAs also have a bit more flexibility in terms of early withdrawal. If your tax rate does not change while you are working vs. when you retire, you will end up with the same amount of money in a Roth IRA as a conventional IRA for a donation less than the maximum allowable. If you save the maximum allowable amount in an IRA, ''and you stay at the same tax rate'', there is a tax advantage to the Roth-IRA. For instance, in 2007 the maximum traditional IRA for a 40 year old was $4000. Any additional investment above that would have to go into a different account. |
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Example: |
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:Below examples show how the value of one year's maximum contribution grows over 30 years, assuming a 10% rate of return and a 25% income tax rate. |
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:''Roth IRA.'' A $5000 contribution to a Roth-IRA will grow to $5000 * 1.1<sup>30</sup> = $87,247. This $5000 contribution is not tax-deductible, the contribution will effectively cost 5000 / (1-0.25) = $6667. |
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:''Traditional IRA.'' A $5000 contribution to a traditional IRA will also grow to $87,247 using the same assumptions and calculations above. When withdrawn, the account is taxed, leaving an available amount of 87,247 * (1 – 0.25) = $65,435. However, if given the same earned $6667 as above, the investor has an additional ($6667 – $5000) * (1 – 0.25) = $1250 to invest in another financial product. |
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::If this $1250 is invested in an account that pays interest, it will grow to 1250 * (1 + .1 * [1-.25])<sup>30</sup> = $10,944. The total after-tax amount is $65,435 + $10,944 = $76,379 (14% less than the above Roth IRA). |
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::If the $1677 is able to be invested into a 401(k) or other tax-exempt investment plan, it would grow to 1667 * 1.1<sup>30</sup> = $29,088. When taxed upon withdrawal, would leave 29,088 * (1 – 0.25) = $21,816. Total after-tax amount is 65,435 + 21,816 = $87,247, just like in the Roth IRA. |
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:''Explanation.'' More money can effectively be placed into the Roth IRA and grow tax-free, making it the better choice if the investor wants to maximize tax-advantaged contributions. |
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--> |
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==See also== |
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*[[Retirement plans in the United States]] |
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*[[Individual retirement account]] |
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==References== |
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{{reflist|2}} |
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==External links== |
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*"[https://web.archive.org/web/20070503204756/http://www.banksite.com/calc/rothira Roth vs. Traditional IRA Calculator]". ''BankSite.com''. The Forms Group. |
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*"[http://www.theusefulinfo.com/finance/compare4R.html 401(k) vs Roth IRA]". ''TheUsefulInfo.com''. |
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*Thomas, Kaye A. "[https://web.archive.org/web/20070423140803/http://www.fairmark.com/rothira/decision.htm Decision factors]". ''Tax Guide for Investors''. Fairmark Press Inc. |
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*"[http://www.retirementdictionary.com/categories/401(k)-Plans/faq 401(k) Plans: FAQs]". ''Retirement Dictionary''. Appleby Retirement Consulting Inc. |
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{{DEFAULTSORT:401(K) Ira Matrix}} |
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[[Category:Individual retirement accounts]] |
Latest revision as of 19:10, 10 May 2024
This is a comparison between 401(k), Roth 401(k), and Traditional Individual Retirement Account and Roth Individual Retirement Account accounts, four different types of retirement savings vehicles that are common in the United States.
Comparison
[edit]Tax Year 2024 | (Traditional) 401(k)[1][2][3] | Roth 401(k)[1][2][3] | Traditional IRA[1][2][3] | Roth IRA[1][2][3] |
---|---|---|---|---|
Tax benefit | Capital gains, dividends, and interest within account incur no tax liability. | |||
Subjected taxes | Contributions are usually pre-tax; but can also be post-tax, if allowed by plan. Distributions are taxed as ordinary income (except any post-tax principal). | Contributions are post-tax. Qualified distributions are not taxable. | Contributions are deductible (subject to conditions). When deducted, contributions are pre-tax, otherwise, they are post-tax. Distributions are taxed as ordinary income (except any non-deducted principal). | Contributions are post-tax. Qualified distributions are not taxable. |
Employer or Individual | Employer or sole proprietor sets up this plan. | Individual sets up this plan. | ||
Contribution Limits | Employee contribution limit of $23,000/yr for under 50; $30,500/yr for age 50 or above in 2024; limits are a total of pre-tax Traditional 401(k) and Roth 401(k) contributions.[4] Total employee (including after-tax Traditional 401(k)) and employer combined contributions must be lesser of 100% of employee's salary or $69,000 ($76,500 for age 50 or above).[5] There is no income cap for this investment class. | $7,000/yr for age 49 or below; $8,000/yr for age 50 or above in 2024; limits are total for traditional IRA and Roth IRA contributions combined. Cannot contribute more than annual earned income. For direct contributions to Roth IRAs, contribution limit is reduced in a "phase-out" range, for single MAGI > $146,000 and joint MAGI > $228,000[6] (For this purpose, however, MAGI excludes any Roth conversions.[7]) Contribution limit does not apply to conversions from traditional IRA (or qualified employer plans) to Roth IRA. | ||
Contribution notes | Effective limit is higher than traditional 401(k) as the contributions are post-tax. | Effective limit is higher than traditional IRA as the contributions are post-tax. | ||
Matching Contributions | Matching contributions available from some employers. | Matching contributions available through some employers, but they must sit in a pretax account.[8] | No matching contributions available. | |
Deduction Limits | Generally no limit on the amount deductible from income, but somewhat complicated due to HCE (highly compensated employees) rules. | Full deduction available on incomes up to $198,000, depending on tax filing status. See full rules. | Tax-exempt earnings on contributions available up to incomes of $208,000, depending on tax filing status. See full rules and Backdoor Roth IRA Contributions. | |
(Traditional) 401(k) | Roth 401(k) | Traditional IRA | Roth IRA | |
Distributions | Distributions can begin at age 59½ or if owner becomes disabled. | Distributions can begin at age 59½ and the account has been open for at least 5 years, or if owner becomes disabled, with some exceptions. | Distributions can begin at age 59½ or if owner becomes disabled. | Distributions can begin at age 59½ as long as contributions are "seasoned" (5 years from January 1 of the year the first contribution was made) or owner becomes disabled. |
Forced Distributions | Must start withdrawing funds at age 72 unless employee is still employed with employer setting up the 401(k), and not a 5% owner. Penalty is 50% of minimum distribution. | Must start withdrawing funds at age 72. Penalty is 50% of minimum distribution. | None. | |
Loans | When still employed with employer setting up the 401(k), loans may be available depending upon the plan, not more than 50% of balance or $50,000. | No | ||
Early Withdrawal | Generally no when still employed with employer setting up the 401(k). Otherwise, 10% penalty plus taxes. There are some exceptions to this penalty.[9] | Generally no when still employed with employer setting up the 401(k). Otherwise, taxes on the earnings, plus 10% penalty on taxable part of distribution and taxable part of unseasoned conversions. There are some exceptions to this penalty. | 10% penalty plus taxes for distributions before age 59½ with exceptions. | Principal of contributions and seasoned conversions can be withdrawn at any time without tax or penalty. Additional amounts are subject to normal income taxes and 10% penalty if not qualified distributions. |
Home Down Payment | Purchase of primary residence and avoidance of foreclosure or eviction of primary residence, subject to 10% penalty, if hardship withdrawals are available in the plan.[10] | If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59 ½. | Can withdraw up to $10,000 for a first time home purchase down payment with stipulations. | Up to $10,000 can be used for primary home down payment. Must have held Roth IRA for a minimum of 5 years. Must not have owned a home in previous 24 months. House must be owned by IRA owner or direct linear ancestors or descendants. |
Education Expenses | Payment of secondary educational expenses in last 12 months for employee, spouse, or dependents, subject to 10% penalty, if hardship withdrawals are available in the plan.[10] | Can withdraw for qualified higher education expenses of owner, children, and grandchildren. | ||
Medical Expenses | Medical expenses not covered by insurance for employee, spouse, or dependents, subject to 10% penalty, if hardship withdrawals are available in the plan. Medical expenses in excess of 7.5% of your adjusted gross income may be exempt to the 10% penalty.[10] | Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability. | ||
(Traditional) 401(k) | Roth 401(k) | Traditional IRA | Roth IRA | |
Conversions and Rollovers | Upon termination of employment (or in some plans, even while in service), can be rolled to IRA or Roth IRA. When rolled to a Roth IRA, taxes need to be paid during the year of the conversion. | Cannot be converted to a traditional 401(k), but upon termination of employment (or in some plans, even while in service), can be rolled into Roth IRA. | Can be converted to a Roth IRA, typically for backdoor Roth IRA contributions. Taxes need to be paid during the year of the conversion. Also, the non-basis portion can be rolled over into a 401(k), if allowed by the 401(k) plan. | |
Changing Institutions | Can roll over to another employer's 401(k) plan or to a rollover IRA at an independent institution. | Can roll over to another employer's Roth 401(k) plan or to a Roth IRA at an independent institution. | Funds can be either transferred to another institution or they can be sent to the owner of the traditional IRA who has 60 days to put the money in another institution in a rollover contribution to another traditional IRA.[11] | |
Beneficiaries | For married persons, federal law dictates that the beneficiary of any form of 401(k) automatically be the surviving spouse. A different party may be named beneficiary, however, provided the surviving-spouse-to-be has consented and the consent is in written form. For single persons, any party may be named beneficiary; however, if no beneficiary is named, then it defaults to the decedent's estate. | When owner dies, spouse as beneficiary can roll both accounts into one IRA account. Other beneficiaries will be subject to forced distributions (taxable) over a ten-year period. Beneficiaries will not pay estate tax if the inheritance is under the exemption amount. | ||
Protection | Account is protected from bankruptcy and creditors (with limited exceptions, e.g. IRS). | Account is protected from bankruptcy up to $1,362,800.[12] Protection from creditors varies by state (from none to full protection). | ||
(Traditional) 401(k) | Roth 401(k) | Traditional IRA | Roth IRA |
See also
[edit]References
[edit]- ^ a b c d "Publication 4530: Designated Roth Accounts Under a 401(k) or 403(b) Plan" (PDF). Internal Revenue Service. August 2009. Archived (PDF) from the original on 2017-09-30. Retrieved 2017-08-10.
- ^ a b c d "Designated Roth Accounts in 401(k) or 403(b) Plans". Internal Revenue Service. October 16, 2009. Archived from the original on June 22, 2012. Retrieved August 10, 2017.
- ^ a b c d "Comparison of Roth 401(k), Roth IRA, and Traditional 401(k) Retirement Accounts" (PDF). Internal Revenue Service. Archived (PDF) from the original on 2010-05-31. Retrieved 2017-08-10.
- ^ "401(k) limit increases to $23,000 for 2024, IRA limit rises to $6,500".
- ^ "Retirement topics: 401(k) and profit-sharing plan contribution limits | Internal Revenue Service".
- ^ "401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000".
- ^ "Publication 17 – Your Federal Income Tax (For Individuals) – Roth IRAs". taxmap.irs.gov. Retrieved 2020-08-30.
- ^ "Retirement Plans FAQs on Designated Roth Accounts". Archived from the original on 2012-08-10. Retrieved 2017-08-10.
- ^ "Topic 424 – 401(k) Plans". IRS.gov Tax Topics. February 5, 2011. Archived from the original on July 3, 2017. Retrieved August 10, 2017.
- ^ a b c "Publication 575 (2010), Pension and Annuity Income". IRS.gov Tax Topics. February 5, 2011. Archived from the original on May 2, 2017. Retrieved August 10, 2017.
- ^ "Publication 590: Individual Retirement Arrangements (IRAs)" (PDF). Internal Revenue Service. January 7, 2010. Archived (PDF) from the original on January 5, 2010. Retrieved August 10, 2017.
- ^ Sheedy, Rachel (September 3, 2019). "Protecting Retirement Accounts from Creditors". Kiplinger. Archived from the original on January 27, 2021. Retrieved February 21, 2021.
External links
[edit]- "Roth vs. Traditional IRA Calculator". BankSite.com. The Forms Group.
- "401(k) vs Roth IRA". TheUsefulInfo.com.
- Thomas, Kaye A. "Decision factors". Tax Guide for Investors. Fairmark Press Inc.
- "401(k) Plans: FAQs". Retirement Dictionary. Appleby Retirement Consulting Inc.