Now more than ever, you’re responsible for your own retirement, so securing your financial future is a major priority. The more you set aside, the more secure your retirement may be. Contribute the maximum allowed to your company plan and, if you’re eligible, contribute to an Individual Retirement Account (IRA) as well. Money in these accounts can grow tax-deferred until retirement.
|Maximum for 2016*||Under age 50||Age 50 or older|
|401(k) or other workplace retirement plan||$18,000||$24,000|
|IRA (traditional or Roth)||$5,500||$6,500|
*Indexed to inflation for future years.
|Traditional IRA||Roth IRA (if eligible)|
|Tax-deductible1 contributions, if eligible||Contributions not tax-deductible|
|Taxable withdrawals||Tax-free withdrawals2|
|Required minimum distribution beginning at age 70½||No required minimum distribution allows for greater withdrawal flexibility.|
|Consider if you will be retiring soon or think you’ll be in a lower tax bracket in retirement and would rather take the tax break now, hoping that rates will be lower when you have to start paying taxes on your withdrawals later.||Consider if it will be a long time until you retire or if you think you’ll be in a higher tax bracket in retirement and would rather skip the tax break now and enjoy tax-free withdrawals later.|
Can I have both a 401(k) and an IRA?
Yes, you can. And Schwab recommends it. Both choices give you the potential for long-term tax-sheltered growth, meaning that your investment earnings are not taxed until you withdraw them. In addition, your contributions to a 401(k) or similar plan are made with pre-tax dollars, meaning that they are tax-deductible. This goes for an IRA as well unless you’re already contributing to a 401(k).
Roth IRA vs. traditional IRA: Which should I choose?
Both traditional and Roth IRAs let your retirement savings remain tax-deferred while in the IRA. But there are several key differences that might make one more appropriate for you than the other.
Traditional IRA—Contributions to a traditional IRA are tax-deductible depending on your income and whether you participate in an employer-sponsored plan such as a 401(k). Any earnings remain tax-deferred but are taxed as ordinary income when you withdraw them.
Roth IRA—There’s no upfront tax deduction for a contribution to a Roth IRA, but you can withdraw any earnings without paying any additional taxes at age 59½ if you’ve held the Roth for five years or more. Other restrictions may also apply. There are also maximum income qualifications for contributing fully to a Roth IRA that vary from $117,000 if you’re single to $184,000 if you’re married filing jointly for the 2016 tax year.
Some factors that may help you decide
Consider a traditional IRA if you qualify for the upfront deduction and you think your tax bracket will be much lower when you retire than it is today.
Choose a Roth IRA if you think your tax bracket will be higher when you retire—an important consideration if you haven’t yet reached your peak earning years. Note: You can convert all or part of a traditional IRA to a Roth IRA. You pay taxes on the amount converted, but after that, no taxes are due as long as you meet the requirements for a qualified distribution. This conversion can make the most sense if you believe that you will be in a higher tax bracket when you eventually withdraw the funds.
What you can contribute
If you have earned income, you can contribute up to the maximum annual contribution. Annual contribution limits are the same for traditional and Roth IRAs. To learn more, read Is a Roth IRA Right for You?