Maximize savings to tax-advantaged retirement and other accounts

#4Maximize savings to tax-advantaged retirement and other accounts

Maximize your savings by contributing to your employer-sponsored retirement plan to get the full match amount and up to the annual contribution limit, if possible. If you can afford to save more, consider opening and funding a IRA, or if you're eligible, contributing to a tax-advantaged Health Savings Account.

Saving for retirement with IRAs and 401(k)s

How much can you contribute?

Maximum for 2020* Under age 50 Age 50 or older
401(k) or other workplace retirement plan $19,500 $26,000
IRA (traditional or Roth) $6,000 $7,000
Total $25,500 $33,000

To Roth or not to Roth?

Here are the basic differences between traditional and Roth IRAs. As you’re deciding which may be best for you, be sure to review all the differences and find out if you’re eligible to contribute by visiting
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.

Make it happen.

Have questions?

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, depending upon whether you are single or married.

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?

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