Unlike regular pre-tax contributions, Roth contributions are taken out of your paycheck after taxes are determined. The big advantage? You pay no taxes when you take your money out in retirement - not even on your investment earnings.
So, how do you know if a Roth contribution is right for you? Ask yourself these questions:
- Will my combined marginal tax rate be higher than or equal to what it is now when I take withdrawals?
- Do I have a significant amount of years before I plan on retiring?
If you answered YES to any of these questions, making a Roth contribution may be right for you.
|
Pre-tax Contributions |
Roth Contributions |
| Tax Treatment |
Deferred until you retire. Contributions and investment earnings are taxed as ordinary income when withdrawn |
Contributions are taxed now and any investment earnings are withdrawn tax-free if you are age 59 ½ or older and you’ve held the account for at least five years when withdrawn
|
| Early Withdrawal Penalties |
10% penalty on distributions made before age 59 ½ |
10% penalty on distributions of investment earnings made before age 59 ½ (or if the account has been held for less than 5 years) |
| Contribution Limits |
Single, annual IRS contribution limit of $23,500 applies to all pre-tax and Roth contributions combined |
| Rollover to IRA |
May be directly rolled over to a traditional IRA or to a Roth IRA |
May be rolled over directly to a Roth IRA |
| Company Contributions |
Eligible for company match |
Eligible for company match |