Hey there! I'm here to help you navigate the confusing world of retirement planning. By now, you've learned a lot about saving for retirement and the different types of accounts available to you. But today, I want to throw another option into the mix: Roth accounts.
Many types of retirement plans offer the Roth options in addition to the Traditional option. They include IRA, 401k, 403(b) and 457 jut to name a few.
Now, before we dive in, it's important to note that while the IRS may allow the Roth in an employer sponsored retirement plan, employers have chosen to offer them in their plans, so you'll need to check to see what's available. But let's talk about the difference between a Roth account and a traditional account.
In a traditional account, whether it's a 403(b), 457, or an IRA, the money you contribute is taken out of your paycheck before taxes are deducted. This means that the growth on your investments is tax-deferred. When you retire and start withdrawing money from your traditional account, you'll have to pay taxes on those withdrawals as ordinary income.
On the other hand, a Roth account option, is funded with after-tax dollars. This means that you've already paid taxes on the money you contribute. The great thing about a Roth account is that any growth or interest you earn grows tax free so it can be withdrawn tax-free in retirement.
To help illustrate the difference, let's use an example.
- Imagine your paycheck is $1,000, and you want to contribute $100 to either your traditional or Roth account. In the traditional account, that $100 comes out of your pre-tax income, so, because taxes are withheld on $900 (instead of the $1000) you'll have about $930 left to spend after taxes. In the Roth account, you'll need to pay taxes on your entire paycheck first, so you'll have $900 left to spend after taxes.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. Investing involves risk, including the potential loss of principal.
- The key difference is that in the traditional account, your contributions and earnings have never been taxed, so they'll be taxed when you withdraw them in retirement. In the Roth account, you've already paid taxes on your contributions, so withdrawals are tax-free.
Here is a link to the Roth vs traditional calculator on our site. Here is a link.
https://www.sji.us.com/resource-center/retirement/roth-401k-vs-traditional-401k
If you're feeling overwhelmed, don't worry! You can reach out to one of our advisors. They can help you understand the benefits and drawbacks of each option and guide you toward the best choice for your specific situation.
Remember, the decision between a Roth and a traditional account is a personal one, and it's important to consider your circumstances. So take a deep breath, don't let your brain shut down, and take action. Whether it's using a calculator, reaching out to an advisor, or doing some more research, take that first step toward securing your financial future.
Thanks for joining me on this journey, and until next time, happy planning!
Disclosure
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.