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Should I increase my monthly percentage into my Roth 401(k) for the remainder of the year?

I've recently maxed out my Roth IRA at $5,500 for my 2018 contributions. I also contribute 6 percent with a 4 percent company match into my Roth 401(k). I am conflicted as to whether or not I should increase my monthly percentage into my Roth 401(k) for the remainder of the year. Alternatively, should I save the additional after-tax cash in a high interest savings account as a cushion to contribute and max out my 2019 Roth IRA contributions?

Banking, IRAs, Taxes
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November 2018

A Roth IRA and Roth 401(k) sound similar, and in many respects, they are. Contributions are made with after-tax money, and your earnings grow tax-free. When you reach age 59 ½, qualified withdrawals are not taxed.  As the owner of the Roth IRA, you don’t need to take required minimum distributions. In determining which Roth is best for you for the remainder of the year and for your future goals, you should understand the differences between the two and decide based on your specific circumstances.

Contribution Amounts:

The maximum you can contribute to a Roth IRA for 2018 is $5,500 or $6,500 if you’re age 50 or older. A Roth IRA is also subject to an income limit. If you’re above that limit, you are not allowed to contribute to a Roth IRA. In a Roth 401(k), the income limit does not apply, however, there is a contribution limit. For 2018, the maximum contribution to a Roth 401(k) is $18,500 or $24,500 if you’re age 50 or older.


Investment options and fees:

In a Roth IRA, you have more investment options to choose from. You have access to a large variety of investments, from individual stocks, ETFs, bonds, mutual funds, REITs, commodities, etc. In a Roth 401(k) plan, you are limited to what the employer plan offers. You should also compare fees in your 401(k) options to similar investments you can get in a Roth IRA. Higher fees will undermine your return.


Early withdrawals:

For the most part, an early withdrawal is when you take money out of a retirement account before you reach age 59 1/2.  With a Roth IRA, you can withdrawal your after-tax contributions without penalty and taxes (you already paid taxes on these funds).  According to the IRS distribution ordering rule, your non-taxable contributions are distributed before taxable earnings. In a Roth 401(k), the distributions are calculated on a pro-rata basis, which means the withdrawal amount is prorated between your original contribution and earnings. Your original contribution will not be tax and is penalty free. The earnings will be subject to the 10% penalty and will be taxed. It’s also important to note that not all 401(k) plans allow for early withdrawals, so you need to check with your 401(k) plan document.


Required Minimum Distributions (RMD):

Generally speaking, when you reach 70 ½, the IRS requires you to start taking withdrawals, know as required minimum distributions, or RMDs from your tax-deferred IRAs such as a traditional IRA, SIMPLE IRA, and SEP IRA. Roth IRAs do not require withdrawals until after the death of the owner. A Roth 401(k) does require you to take RMDs at 70 ½ unless you are still working for the company and not a 5% or greater owner. If you leave your employer, you can roll over your Roth 401(k) to a Roth IRA to avoid the RMD.

Keeping these differences in mind, you should not only think about where to put your money today or next year, but what fits you best for years to come.

November 2018
November 2018
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November 2018