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have the option of opening either a traditional or Roth IRA, which will determine whether those funds are taxed when withdrawn (traditional) or when contributed (Roth).
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