The choice between a Roth IRA, traditional IRA, or 401(k) depends on various factors such as your financial goals, current tax situation, and retirement plans.
Here’s a brief overview of each:
- Roth IRA
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- Contributions are made with after-tax dollars.
- Qualified withdrawals, including earnings, are tax-free.
- No required minimum distributions (RMDs) during your lifetime.
- Best for individuals who expect their tax rate to be higher in retirement.
- Traditional IRA
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- Contributions may be tax-deductible, reducing taxable income in the contribution year.
- Earnings grow tax-deferred, but withdrawals are taxed as ordinary income.
- Mandatory RMDs starting at age 72.
- Suitable for those who anticipate a lower tax rate in retirement.
- 401(k)
401 (k) vs Fire Movement http://dorianfinance.com/401k-vs-fire-movement
- Employer-sponsored retirement plan.
- Contributions are made with pre-tax dollars, reducing current taxable income.
- Earnings grow tax-deferred until withdrawal.
- Mandatory RMDs starting at age 72.
- Often comes with employer matching contributions.
Consider the following factors when making a decision:
- Tax implications: Do you want to take advantage of tax-free withdrawals (Roth) or tax-deductible contributions (traditional)?
- Income and tax bracket: Consider your current and expected future tax bracket.
- Employer contributions: If your employer offers a 401(k) match, it can be a significant benefit.
- RMDs: Are you comfortable with mandatory withdrawals (traditional IRA and 401(k))?
It’s often recommended to diversify your retirement savings across different account types to mitigate risks associated with changing tax laws and economic conditions.
