Should I Contribute to a Roth IRA or 401(k) in 2024?

With so many acronyms and numbers thrown around in the retirement world, it can be complicated to understand how it all works and what's best for you. Two popular retirement accounts that you've probably come across are the Roth IRA (individual retirement account) and 401(k). Although both accounts will help you beef up your retirement savings, their rules and limits are completely different. Below, we've outlined how they both work so you can make progress toward your retirement goals before the year ends.

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The basics of a 401(k)

A 401(k) is an employer-sponsored retirement plan where you can contribute a portion of your paycheck before taxes are taken out. Here's how it works:

• Upfront tax break : Contributions are made pre-tax, which reduces your taxable income for the year. For example, if you earn $100,000 and contribute 15% of your salary to a regular 401(k), your taxable income would drop to $85,000 in 2024. Your money grows tax-deferred until you withdraw it in retirement, at which point you'll have to pay taxes at your ordinary income tax rate.
• Contribution limits : If you're trying to catch up on retirement savings, the high contribution limits make it possible. For 2024, you can contribute up to $23,000 to a 401(k) if you're under 50 and up to $30,500 if you are 50 or older. Keep in mind that you can't contribute additional dollars to a former employer's 401(k) plan.
• Company match : Employers may match your 401(k) contributions up to a certain limit. If your employer offers a 50% match on contributions up to 6% of your salary, and you earn $100,000 annually, they will contribute an additional $3,000 to your 401(k) if you contribute $6,000. Note that you must be fully vested to keep employer contributions if you leave your job.

If you withdraw money from your 401(k) before age 59½, you might be subject to a 10% penalty and income taxes. However, you can typically roll over your existing 401(k) to your new employer's 401(k) or your own IRA without tax tax consequences. But if you do a rollover to a Roth IRA , you'll be on the hook for taxes. Also, you'll be required to start taking money out from your 401(k) or traditional IRA in your 70s and pay taxes on the withdrawals, which is known as a required minimum distribution .

How a Roth IRA works

While a 401(k) is tied to your employer, a Roth IRA is an individual retirement account that you set up and manage on your own. Here are a key differences that set the Roth IRA apart:

• Tax-free income during retirement : Roth IRA contributions are made with after-tax dollars. Your money grows tax-free, and qualified withdrawals during retirement are tax-free, unlike a 401(k) which provides immediate tax benefits.
• Contribution limits : For 2024, you can contribute up to $7,000 if you are under 50, and up to $8,000 if you are older. You can make contributions up until April 15, 2025.
• Income limits : You won't qualify to make direct contributions to a Roth IRA if your modified adjusted gross income exceeds the thresholds . For example, single filers can contribute the full amount if their income is below $146,000, with reduced contributions allowed up to $161,000.

You can always withdraw Roth IRA contributions without penalty. However, earnings can only be withdrawn tax-free after age 59 1/2, as long as you have met the requirements of the five-year rule .

Your 401(k) and Roth IRA contribution plan

You can contribute to both a 401(k) and a Roth IRA if you meet the requirements. If your income is too high for a Roth IRA, consider setting aside money in a traditional IRA . A traditional IRA is a tax-deferred retirement account with the same contribution limits as a Roth IRA. Contributions may be tax-deductible, and earnings grow tax-deferred until withdrawal.

There's a lot to consider when planning for retirement, but you can start by examining the pros and cons of each account, reviewing your finances, and thinking about your long-term goals. If you can squeeze extra dollars out of your paycheck to maximize your contributions to both a 401(k) and a Roth IRA, you may have a better shot at reaching a million-dollar retirement faster.

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