What to do with the Stimulus check?

Roth IRA or 401k?  Jay goes into what you can do with your stimulus check to contribute to your retirement.

What to Do with the Stimulus Check?  If you’re working at a company that offers an employer-sponsored retirement plan — specifically, a 401(k) plan — you might be wondering if you should participate in this or open a new individual retirement account (IRA) or continue to fund your existing IRA. There are benefits and tax considerations for both of these tax-advantaged retirement plans. Here are some factors to compare:

Annual contribution limits. For 2021, an individual may contribute up to $6,000 to a traditional or Roth IRA (with an additional $1,000 in catch-up contributions for people age 50 and older). Note that taxpayers may be limited in their contribution limits to a Roth IRA or be prohibited from contributing at all, based on modified adjusted gross income (for single filers or those filing jointly), as detailed by the IRS.

Employees with a 401(k) plan may contribute up to $19,500, and the catch-up contribution is also much higher at $6,500. In addition, a 401(k) plan may have an employer match (often 2% or 3%), which helps boost retirement savings more quickly; this may require the employee to make a required contribution amount to trigger the employer match. The employer’s contributions do not count toward the employee’s contribution limit.

With a 401(k) plan, the employee’s contributions are deducted from their salary as a pretax contribution, and funds grow tax-deferred. With an IRA, you have the option of opening either a traditional or Roth IRA, which will determine whether those funds are taxed when withdrawn (traditional) or when contributed (Roth).

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