Pre-tax Contributions: The money you put into a Traditional IRA is typically tax-deductible in the year of the contribution.
Taxes on Withdrawals: The money you withdraw during retirement is taxed as regular income.
Required Minimum Distributions: Once you reach age 72, you are required to start taking minimum distributions from your account, whether you need the money or not.
Early Withdrawal Penalty: If you withdraw funds before age 59 1/2, you typically have to pay a 10% penalty in addition to regular income tax, although there are certain exceptions.
Roth IRA:
After-tax Contributions: The money you put into a Roth IRA has already been taxed, so you get no tax deduction for contributions.
Tax-free Withdrawals: The money you withdraw during retirement is generally tax-free, as long as you're at least 59 1/2 and the account has been open for at least five years.
No Required Minimum Distributions: Unlike a traditional IRA, a Roth IRA has no mandatory distributions during the lifetime of the original owner.
Early Withdrawal Flexibility: You can withdraw your original contributions (but not any earnings) at any time without penalty or tax. For earnings, regular rules apply.
Pre-tax or Roth Contributions: Depending on your plan, you may have the option to make pre-tax contributions (like a traditional IRA) or after-tax contributions (like a Roth IRA). Some plans even offer both.
Taxes on Withdrawals: Like an IRA, the money you withdraw during retirement from a traditional 401(k) is taxed as regular income. Withdrawals from a Roth 401(k) are tax-free.
Employer Match: Many employers will match a portion of your 401(k) contributions, which can significantly increase the value of the account.
Higher Contribution Limits: The annual contribution limit for a 401(k) is much higher than for an IRA.
Early Withdrawal Penalty: Similar to an IRA, there's typically a 10% penalty for withdrawing funds before age 59 1/2, with certain exceptions.
