By JEAN FOLGER Updated February 15, 2023 Fact checked by VIKKI VELASQUEZ Roth IRA vs. 401(k): If you can, max out both.
To boost your nest egg An Overview Popular tax-advantaged retirement savings accounts that allow your savings to grow tax-free include Roth IRAs and 401(k)s. However, they differ with regard to employer contributions, investment options, and tax treatment.
Pre-tax contributions to a 401(k) account are deposited prior to your income taxes being deducted from your paycheck. You can deduct the amounts from your taxes, lowering your taxable income. However, withdrawals in retirement are subject to income tax at your then-current rate.
In contrast, contributions to a Roth IRA are not subject to a tax deduction. However, when you retire, you can withdraw the earnings and contributions without paying any taxes.
In a perfect world, you would put money away in both accounts so that it could grow tax-deferred for years. However, you should be aware of a few rules, income limits, and contribution limits before making such a move.
The most important takeaways are that your savings can grow tax-deferred in Roth IRAs and 401(k)s.
You can get a 401(k) match from many employers, which will match your contributions up to a certain percentage of your income.
You can deduct 401(k) contributions from your taxable income, lowering your taxable income before taxes are deducted from your paycheck.
Contributions to a Roth IRA are not subject to a tax deduction, but withdrawals can be made tax-free in retirement.
401(k) retirement distributions are subject to ordinary income tax.
