A 401(k) is an employer-sponsored retirement plan to which you can contribute a portion of your salary before taxes are deducted. A Roth IRA (Individual Retirement Account) retirement plan is a powerful tool to save for your future and enjoy a comfortable retirement. This plan is different from other traditional retirement plans because contributions to a Roth IRA are made with after-tax money, offering fantastic tax benefits and flexibility to access your higher-yielding savings.
Initially created in 1997 through the Retirement Savings Account Act, and named after Senator William Roth who sponsored it, the goal of Roth IRA plans is to provide Americans with an alternative savings option for your retirement that complements traditional plans, such as traditional IRAs or 401(k)s.
It works very simply: contributions to a Roth IRA plan are made with after-tax money, meaning you have already paid income taxes on that amount.
There is a contribution limit per year that is adjusted each year according to federal laws and inflation, for example, in 2023 the limit was $6,500 for people under 50 years old, and $7,500 for people over 50 years old.
The biggest advantage of Roth IRA plans is that the investments placed there grow tax-free, this means that you will not pay taxes on the earnings from interest, dividends or capital gains generated with all the money placed in your plan. savings, then keep it that way even if you withdraw the money in the future.
The options that Roth IRAs provide for investing are many, from stocks, bonds and mutual funds to ETFs.
How Do Roth IRA Retirement Plan Withdrawals Work?
Experts recommend waiting until the requirements are met so that the withdrawals are considered qualified, that is, withdrawals that are made after age 59 and a half and that have met the tenure requirements: if the person who owns the plan meets these requirements, those withdrawals are tax-free.
You can withdraw contributions at any time without additional tax penalty, which can also be very useful to access your money before retirement in case of a need or urgency.
There are no mandatory minimum distribution requirements once you reach retirement age. This means that money can continue to grow in your account indefinitely.
In summary, Roth IRA plans have a series of great advantages that should be considered when looking for a complement to your retirement savings:
Earnings within a Roth IRA grow tax-free, allowing you to accumulate greater wealth over the long term.
You can withdraw your contributions at any time without penalties or additional taxes. Additionally, qualified withdrawals after age 59½ are also tax-free.
Unlike other retirement plans, you’re not required to start withdrawing money from your Roth IRA once you reach retirement age. You can continue contributing to your Roth IRA even after you turn 70, as long as you have earned income.
You can designate beneficiaries for your Roth IRA, and they can inherit the money without it being taxed.
How a Roth IRA works
While a 401(k) plan is tied to your employer, a Roth IRA is an individual retirement account that you make and manage on your own, here are some of the key differences that set the Roth IRA apart
Tax-free income during retirement:
Contributions to a Roth IRA are made with after-tax dollars. Your money grows tax-free and qualified withdrawals in retirement are tax-free, unlike a 401(k) plan, which provides immediate tax benefits.
Contribution limits
PFor the year 2024, you can contribute up to $7,000 if you are under age 50 and up to $8,000 if you are older. You can make contributions through April 15, 2025.
Income limits
You will not be able to make direct contributions to a Roth IRA if your modified adjusted gross income exceeds the limits; for example, single taxpayers can contribute the full amount if their income is less than $146,000, and reduced contributions are allowed up to $161,000.