2021 is almost over had you reviewed all your retirement accounts 401k, IRA, saving, etc…. Or maybe you don’t have one and need to start looking into retirement? Whatever your current status is just remember to check your deadlines so you can plan how best to fund your account. Roth IRA is a great way to go and be tax free when you go to retire. Check out these two links for those who have accounts and those needed to set up one!
The new year is rapidly approaching, but you still have time to max out your Roth IRA contributions.
The popular retirement accounts, which many experts agree are the right choice for young investors, have a $6,000 annual contribution limit for investors under 50 years of age. However, the deadline for 2021 contributions isn’t until a few months into 2022.
“You have all the way up until the tax deadline,” Laurie Allen, a certified financial planner at LA Wealth Management tells CNBC Make It. “And if it doesn’t get delayed like it has been in previous years, that’s going to be April 15.”
With a Roth IRA, you invest money that’s already been taxed. When you withdraw it in retirement, you get the gains tax-free, assuming you follow the withdrawal requirements. That’s why, if you haven’t already, you should be sure to max out your contributions or invest as much as you can afford to.
“The sooner your dollars are in, the sooner you’re getting the rewards of investing” thanks to compounding, says Charles Sachs, chief investment officer at Kaufman Rossin Wealth. “Compound interest is a gift that you really don’t want to miss out on.”
Both Allen and Sachs recommend spreading your investments over the year so that you don’t find yourself making one big investment before the deadline.
“We encourage our clients to make contributions throughout the whole year so they can hit the market on different places,” Allen says.
She adds that this strategy is especially useful in reducing stress around the end of the year.
“You’re more likely to hit the max [contribution],” she says. “You don’t want to stress about it right around the holidays when you’re trying to buy Christmas presents, pay taxes or anything like that.”
These are the key differences between 401(k) and Roth IRA retirement plans
This story is part of CNBC Make It’s One-Minute Money Hacks series, which provides easy, straightforward tips and tricks to help you understand your finances and take control of your money.
If you’re thinking about starting to save for retirement, chances are good that you are looking at both Roth IRA and 401(k) plans. Both offer tax benefits and can help you grow your wealth over time, but there are several key differences between the two. The biggest one? When you want to pay taxes — now or later.
If you have access to an employer-sponsored 401(k) account, you pay taxes when you withdraw your earnings in retirement at whatever rate your tax bracket is at the time. The account is funded with pre-tax dollars diverted from your paycheck by your employer, which lowers your taxable income each year that you contribute.
Roth IRAs, on the other hand, are funded with post-tax dollars, so the money grows tax-free. You can also withdraw your contributions at any time (but not your earnings) with no tax penalty, unlike 401(k)s which typically hit you with a 10% penalty if you access any of the money early.
Many employers offer to match a certain percentage of employee 401(k) contributions, effectively doubling a portion of your investment each pay period for free. If your employer offers a contribution match, don’t leave any money on the table.
“We always encourage people to contribute enough to get the maximum employer contribution,” says Sarah Hampton, co-founder and partner at wealth management firm 6 Meridian.
The maximum amount workers under 50 can put in their 401(k) in 2021 is $19,500. Those 50 and older can also put in an additional $6,500 in catch-up contributions. With Roth IRAs, investors younger than 50 are limited to contributing $6,000 in 2021, and those 50 and older can contribute an additional $1,000.
“Contribute early and often, because you can’t catch up later,” Hampton says of 401(k) plans. “Once the calendar year is gone, you can’t go back.”
When it comes to the control you have over your money, 401(k)s limit you to pre-screened funds that have been approved by your employer’s plan, whereas a Roth IRA gives you a wider range of options including stocks, bonds, ETFs and index funds.
However, if you can afford it, Hampton recommends contributing to both a 401(k) and a Roth IRA. “You get a more tax-favorable outcome this way,” she says. “Your Roth IRA and 401(k) can continue to compound their growth on each other, as opposed to having to pay tax as you go.”
No matter what you choose, the earlier you decide to start investing, the better you set yourself up for retirement.