Frequently Asked Questions (FAQs)

401(k): A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary before taxes are taken out. Contributions grow tax-deferred until withdrawal, typically during retirement. Employers may also offer matching contributions, enhancing the growth potential of your investments.

Roth IRA: A Roth Individual Retirement Account (IRA) is a personal retirement savings account where contributions are made with after-tax dollars. The key advantage is that both contributions and earnings can be withdrawn tax-free in retirement, provided certain conditions are met. Roth IRAs offer more investment options compared to 401(k)s but have income limits for eligibility.

A taxable investment account is a brokerage account that allows you to invest in various securities like stocks, bonds, mutual funds, and ETFs without the tax advantages of retirement accounts. While there's no limit to how much you can contribute, earnings from investments (dividends, interest, and capital gains) are subject to taxes in the year they are realized. These accounts offer flexibility for saving and investing beyond retirement.

Consider a 401(k) if:

• Your employer offers a matching contribution, which is essentially free money.
• You want to reduce your taxable income now, as 401(k) contributions are pre-tax.
• You plan to contribute more than the Roth IRA limit allows.

Consider a Roth IRA if:

• You expect to be in a higher tax bracket during retirement.
• You prefer tax-free withdrawals in retirement.
• You want more control over your investment options.
• You are eligible based on income limits.

Many financial advisors recommend contributing enough to your 401(k) to receive the full match and then contributing to a Roth IRA to diversify your tax situation in retirement.

401(k) Contribution Limits for 2025:

• Employee Contribution Limit: $23,000
• Catch-Up Contribution (age 50+): Additional $7,500
• Total Contribution Limit (including employer contributions): $66,000

Roth IRA Contribution Limits for 2025:

• Individual Contribution Limit: $7,000
• Catch-Up Contribution (age 50+): Additional $1,000
• Income Limits: Eligibility to contribute to a Roth IRA phases out at higher income levels. For 2025, the phase-out ranges may adjust annually based on inflation.

Note: Contribution limits are subject to change based on IRS updates. Always consult the latest IRS guidelines or a financial advisor for current limits.

If your income exceeds the eligibility limits for contributing directly to a Roth IRA, you can utilize a Backdoor Roth IRA. This involves making a nondeductible contribution to a traditional IRA and then converting those funds to a Roth IRA. This strategy allows high-income earners to take advantage of Roth IRA benefits despite income restrictions. It's important to consult with a tax professional to navigate the rules and potential tax implications.

Yes, you can contribute to both a 401(k) and a Roth IRA in the same year, provided you meet the eligibility requirements for each account. Contributing to both allows you to diversify your tax-advantaged savings, balancing pre-tax and after-tax contributions to optimize your tax situation in retirement.

Increasing your contributions over time, such as by a set percentage annually, can significantly enhance your investment growth due to the power of compound interest. This strategy helps you gradually save more without a sudden impact on your budget, potentially leading to a larger retirement nest egg and greater financial security.

401(k):

• Tax-Deferred Growth: Investments grow without being taxed until withdrawal.
• Pre-Tax Contributions: Reduce your current taxable income.
• Employer Matching: Free additional contributions if offered.

Roth IRA:

• Tax-Free Growth: Investments grow and can be withdrawn tax-free in retirement.
• After-Tax Contributions: No immediate tax benefit, but offers tax-free withdrawals later.
• No Required Minimum Distributions (RMDs): Unlike traditional retirement accounts.

401(k):

• Typically offers a limited selection of mutual funds, index funds, and company stock.
• Investment choices are determined by the plan provider chosen by your employer.

Roth IRA:

• Offers a wide range of investment options, including individual stocks, bonds, mutual funds, ETFs, and more.
• Greater flexibility to tailor your investment portfolio to your personal financial goals.

Employer matching is a benefit where your employer contributes additional funds to your 401(k) based on your own contributions. For example, an employer might match 50% of your contributions up to 6% of your salary. This effectively increases your total retirement savings and offers an immediate return on your investment. It's advisable to contribute at least enough to receive the full match to maximize this benefit.