What is the Difference Between a Roth IRA and a Traditional IRA?
Roth IRAs and traditional IRAs offer different tax benefits. With a Roth IRA, you will be taxed on your current contributions. Upon retirement, you won’t be taxed when you make withdrawals. Your contributions to a traditional IRA, on the other hand, are tax-deductible in the year you make them. When you withdraw down the line, you will have to pay taxes on that income.
What is the Difference Between a 401(k) and an IRA?
A 401(k) and IRA have different maximum contributions as well as different tax benefits. However, the most significant difference between the two is that a 401(k) is a type of employer-sponsored retirement account. If your employer offers a 401(k) retirement plan, your contributions to this account will be deducted from your paycheck. Your employer will also contribute to the account.
An IRA, on the other, is more self-driven. You don’t need to have an employer sponsoring this type of account to set one up. You set up the account yourself and decide when to withdraw funds. If you do have an employer, your contributions will still be deducted from your paycheck. Your employer also has the option to contribute to the account.
Can I Contribute to Both a 401(k) and IRA?
Yes, you can contribute to both a 401(k) and an IRA in the same year. By doing so, you can save even more for your retirement and pay less in taxes. You still have to follow the guidelines on how much you are allowed to contribute to each account annually.