The Rise of Employer-Provided Retirement Plans
Navigating the world of retirement planning can be a maze, especially when it comes to picking between Traditional and Roth 401(k) options. Here at Accardi Financial Group, we break it down for you.
As of 2020, 67% of private workers had access to retirement plans through their employers, as per the Bureau of Labor Statistics. Among these employers, 88% now offer a Roth 401(k) option.
Roth vs. Traditional 401(k): The Main Differences
- Contribution Limit: Both have the same, at 100% of your pay (max. $22,500 for 2023; $30,000 if 50+ years old).
- Taxation: The core difference lies in how they’re taxed.
- Traditional 401(k): Pre-tax contributions lower your current AGI and taxes.
- Roth 401(k): Post-tax contributions don’t impact AGI. Note: The SECURE 2.0 Act allows employer-matching contributions to go to Roth 401(k) post-2023.
- Withdrawals: Traditional 401(k) distributions are taxed as ordinary income. Roth offers tax-free “qualified” distributions, with specific conditions.
Rules for Withdrawals
- Traditional 401(k): Taxed withdrawals; potential penalties for accessing funds before age 59 ½ unless an IRS exception applies.
- Roth 401(k): Tax-free for qualified withdrawals. To qualify: 5-year holding period and age 59 ½ or older required. Non-qualified distributions may be taxed or penalized on earnings.
Deciding Between Traditional and Roth 401(k)
- Tax Forecasting: If you anticipate higher taxes and income during retirement, Roth may be ideal. Lower future taxes/income lean toward Traditional.
- Cash Flow Analysis: Utilizing tools like the Bucket Strategy can help project income changes and their tax implications.
- Other Factors:
- Access: Roth 401(k) has no income caps.
- Withdrawals Impact: Roth doesn’t affect Social Security taxation or Medicare premiums.
- Flexibility: Roth 401(k) requires adherence to the 5-year rule, impacting its flexibility.
If indecisive, consider diversifying by contributing to both. Adjusting contributions as per income changes can offer tax benefits during retirement.
Plan smartly for your future. At Accardi Financial Group, we’re here to guide you through these decisions. Reach out to us today!
Important Information:
The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client’s or prospective client’s portfolio, thus, investments may result in a loss of principal.
IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.
Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.
Distributions of principal from a Roth 401K are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth 401K was established, whichever is longer. Your investment options are limited with a Roth 401(k) to those offered by the plan administrator; charges and fees may be incurred.
The information provided is based on current laws, which are subject to change at any time. Accardi Financial Group is not affiliated with or endorsed by the Social Security Administration or any government agency.
Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.
This material was prepared by Lucia Capital Group.
Danielle Accardi is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the respective names Lucia Capital Group and Accardi Financial Group which are separate entities from LPL Financial. LPL ART-519154 (12/23)