2020 Roth IRA Income Limits Filing Status Modified AGI Contribution Limit Married filing jointly or qualifying widow(er) Less than $196,000 $6,000 ($7,000 if you're age 50 or older) $196,000 to $206,000 Reduced $206,000 or more Not eligible Single, head of household, or married filing separately (and you didn't live with your spouse at any time during the year) Less than $124,000 $6,000 ($7,000 if you're age 50 or older $124,000 to $139,000 Reduced $139,000 or more Not eligible Married filing separately (if you lived with your spouse at any time during the year) Less than $10,000 Reduced $10,000 or more Not eligible

To help you decide which IRA to invest in, look at your current tax bracket compared to your projected tax bracket during retirement. Try to choose according to which plan results in lower taxes and more income (granted, determining this may not be an easy thing to do).

In general, a Roth is the better choice if you expect to be in a higher tax bracket in retirement, or if you expect to have significant earnings in the account. As long as you take qualified distributions, you won't ever pay taxes on earnings.﻿﻿

401(k) Plans

Like IRAs, 401(k) plans are tax-advantaged accounts used to save for retirement. But instead of being set up by individuals (that's the "I" in IRA), they're offered by employers.﻿﻿

Note that 401(k)s are defined contribution plans. Employees make contributions to their 401(k)s through automatic payroll withholding. And the employer can add money, too, through something called an employer match.﻿﻿

For example, your employer might contribute up to 5% of your salary—as long as you put in at least that amount yourself. If your employer offers a match, do everything you can to max out your contributions to get that match—it's essentially free money.

401(k) Contribution Limits

For 2020, you can contribute up to $19,500 to your 401(k), or $25,500 if you're age 50 or older (because of a $6,500 "catch-up" contribution).﻿﻿

Employers can contribute, too. For 2020, there's a $57,000 limit on combined employee and employer contributions, or $63,500 if you're age 50 or older.﻿﻿

These high contribution limits are one advantage that 401(k)s have over traditional and Roth IRAs.﻿﻿

What If You Can Contribute to a 401(k) or an IRA?

It may be that you are eligible to make traditional IRA or Roth IRA contributions as well as salary deferral contributions to a 401(k) plan. But you may not be able to afford to do both.

You must decide what is most beneficial to you—to make one, two, or all three work. Some of the following concepts can also apply if you have the option of contributing to both a traditional 401(k) and a Roth 401(k).

Let's look at Casey, who works for Company A and is eligible to make a salary deferral to Company A's 401(k) plan. Casey's annual compensation is $50,000, and he can afford to contribute $2,000 each year, which he has decided to put into one account to avoid excessive fees. Therefore, Casey must decide whether it makes better financial sense to contribute to the 401(k) or to an IRA.

If There Is a Company Match

If Company A provides a matching contribution on Casey's salary deferral contributions, the 401(k) will be the better choice. Below is a look at the growth of his accounts over a 10-year period, assuming an employer match of $1 for each $1 Casey contributes, up to 3% of his salary.

This means that Casey will receive a matching contribution of $1,500 ($50,000 x 3%). In 10 years, his 401(k) would grow significantly faster than an IRA.

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If There Isn't a Company Match

If Company A isn't making matching contributions to the 401(k) plan it offers, Casey should consider the following questions before deciding whether to invest in the 401(k):

Which investment choices are available? Large corporations typically limit investment choices to mutual funds, bonds, and money-market instruments. Smaller companies may do the same but are typically more likely to allow self-direction of investments.

That means participants can choose among stocks, bonds, mutual funds, and other available investments, similar to the investment options available in a self-directed IRA. If investments in the 401(k) are limited, Casey may do better if he contributes to an IRA, which would provide a broader range of investment choices.

What are the fees? One hot-button issue is the fees that are charged to 401(k) accounts. These are not as visible as the fees that are charged to an IRA, leading many participants to believe that 401(k) fees are minimal to non-existent.

Casey would need to research the fees that apply to his company's 401(k) plan and compare them with the operational and trade-related fees that apply to the IRA.

Are the 401(k) funds accessible? While retirement savings are intended to accumulate until retirement, situations sometimes arise that leave a participant no choice but to make withdrawals or take out a loan from their retirement accounts.

Generally, assets in a 401(k) plan cannot be withdrawn unless the participant experiences a triggering event.﻿﻿ However, if Company A's plan has a loan feature, Casey could take a loan from his account and repay it within five years (or longer, if the loan is to be used for the purchase of a principal residence).﻿﻿

IRA assets can technically be withdrawn at any time. However, if you're under the age of 59½, your distribution will be considered taxable income, and it may be subject to a 10% additional tax (or penalty).﻿﻿ However, except for a rollover contribution, the amount cannot be repaid to the IRA.﻿﻿ ﻿﻿

What's the cost of professional management? If Casey isn't proficient in investment management or doesn't have the time to properly manage his plan investments, he may need the services of a professional investment advisor. That person could make sure his asset allocations are consistent with his retirement goals and objectives.

If Casey's employer provides those services as part of its employee benefits package, Casey won't incur an additional cost to have a professional manage his investments. This perk may not be available for an IRA unless an employer extends such services to assets outside of its employer-sponsored plan.

These points are worth considering, even if matching contributions are being made to the 401(k) account. But without a match, the answers to these questions may lead Casey to conclude that the savings benefits of an IRA outweigh those of a 401(k).

What about tax deductions? Contributions to a 401(k) reduce taxable income.﻿﻿ So do contributions to a traditional IRA—but those employed by a company with a retirement plan, like Casey, are subject to income limits on how much of the contribution is deductible, as noted above.﻿﻿﻿﻿

And of course, contributions to a Roth IRA are not tax-deductible at all; the benefit of a Roth IRA is that withdrawals at retirement are not taxed, unlike withdrawals from a traditional IRA or 401(k).﻿﻿﻿﻿ Figure out how important getting a tax deduction this year is when choosing among retirement plans.

What If You Could Contribute to a 401(k) and an IRA?

Now, let's take a look at TJ, who can afford to fund her 401(k), a traditional IRA, and a Roth IRA. If she can afford to contribute the maximum to all her accounts, then she may have no need to be concerned with how to allocate her savings.

But let's assume TJ can afford to save only $7,000 for the year. The points of consideration for Casey (above) may also apply to TJ. In addition, TJ may want to consider the following:

1. Getting the maximum match: If a matching contribution is being made to the 401(k) plan, consider the maximum amount that needs to be contributed to the plan in order to receive the maximum available matching contribution.

For example, assume TJ's compensation is $80,000 per year, and the match is $1 for $1 up to 3% of compensation. She will need to contribute at least $2,400 to her 401(k) plan in order to receive the maximum available matching contribution of $2,400.

2. Choosing between IRAs: If TJ puts $2,400 into her 401(k), she'll have $4,600 of savings left for her IRA contribution. She will have to do the math (or check with her tax advisor) to find out how much of her traditional IRA contributions would be tax-deductible and factor that into her decision to choose a Roth IRA, a traditional IRA—or a contribution of the two.

Whatever she decides, her total contributions to both IRAs cannot exceed the limit for that tax year.﻿﻿

If you have more than one IRA, your total IRA contributions cannot exceed the $6,000 ($7,000 if you're age 50 or older) limit for the year.﻿﻿

3. Which to fund first: It is usually best to make contributions to the retirement accounts early in the year, or a little each month—beginning early in the year so that the assets can start accumulating earnings as soon as possible.

Consider how matching contributions are made, too. Some companies contribute the amount in one lump sum at the end of their tax-filing deadline, while others contribute amounts throughout the year. If the latter applies, it's better to make salary deferral contributions to the 401(k) early in the year.

Other Points to Consider

In addition to the points listed above, you should consider other factors, such as:

1. Age and retirement horizon: Your retirement horizon and age are always important points of consideration when determining proper asset allocation. However, if you are at least age 50, participating in a plan that includes a catch-up contribution feature can be an attractive choice, especially if you are behind in accumulating a retirement nest egg.﻿﻿

If that describes you, choosing to participate in a 401(k) plan with a catch-up feature can help to add larger amounts to your nest egg each year. IRAs have catch-up features, too, but you can add only $1,000, not $6,000, to your contribution.﻿﻿

2. Purpose of funding a retirement account: While retirement accounts are usually intended to finance your retirement years, some people plan to leave these accounts to their beneficiaries.

In that case, you have to think about whether you want to leave tax-free assets to your beneficiaries, and whether you want to avoid having to take required minimum distributions (RMDs) that will lower the balance in your accounts. Roth IRAs and Roth 401(k)s allow you to pay taxes when you make the initial contributions. For Roth IRAs, the RMD rules do not apply to the IRA owner, which allows for a larger balance to be left to beneficiaries.﻿﻿

Certain government entities offer special retirement plans for employees.

The Bottom Line

For those who are eligible to fund multiple types of retirement accounts and have the money to fund them all, choice is not an issue. For those who don't have money to fund multiple accounts, picking the best option(s) can be challenging.

In many instances, it boils down to whether you prefer to take the tax breaks on the back end with Roth IRAs, or on the front end with traditional IRAs.﻿﻿ The ultimate purpose of the account, such as retirement versus estate planning, is also an important factor. A competent retirement planning advisor can help people facing these issues to make practical choices.