Dear Liz: Can you explain the difference between a Roth IRA and a Roth 401 (k)? What are the advantages of a Roth 401 (k)? My company offers it and I am considering starting to make deferred contributions to it while continuing my 401 (k) contributions.
Reply: Contributions to Roth IRAs and Roth 401 (k) are after-tax, which means you don’t get an initial tax deduction like you do with traditional IRA and 401 (k) accounts. But the money grows tax-deferred and may be tax exempt in retirement.
You typically open and contribute to a Roth IRA at a brokerage firm, which gives you access to a wide range of investment options. Much like traditional 401 (k) accounts, Roth 401 (k) are offered by an employer, usually with a limited number of investment choices.
Roth 401 (k) allow people to contribute much more than they could to Roth or traditional IRAs. The Roth 401 (k) also allow contributions from high earners, who might be excluded from contributing to a Roth IRA.
Roth IRA contributions are limited to $ 6,000 with a catch-up contribution of $ 1,000 for those 50 and over. Your ability to contribute begins to decline after certain income limits. This year the phase-outs start at $ 125,000 of adjusted adjusted gross income for single filers and $ 198,000 for married couples filing jointly.
Roth 401 (k) have no income limit and allow you to contribute up to $ 19,500 ($ 26,000 for those 50 and over). This is the combined limit for elective deferrals from your paycheck. If you are under 50 and contribute $ 10,000 to the pre-tax portion of 401 (k), for example, you could contribute up to $ 9,500 to the Roth option.
The Roth IRAs and Roth 401 (k) also have different rules for withdrawals. You can withdraw your contributions from a Roth IRA at any time without paying taxes or penalties. Withdrawals from a Roth 401 (k) before the age of 59 and a half can also result in taxes and penalties, although you usually have the option of taking out loans.
Plus, you don’t have to start making withdrawals at age 72 on a Roth IRA, as you typically do with other retirement accounts, including Roth 401 (k) s. You will have the option of converting a Roth 401 (k) into a Roth IRA, usually after you quit your job, in order to avoid the minimum distributions required this way.
Sudden death brings a dilemma
Dear Liz: My son passed away suddenly and his million dollar life insurance policy was assigned to me, his mother. I want the money to be divided equally between her two children for future use. They are now 18 and 15 years old. Which financial vehicle should I use? The funds are in my money market account just waiting to be placed in something.
Reply: Please use some of the money to pay for personalized advice from advisors who are trustees. Trustee means that the advisor is required to put your interests first. Most advisors are not trustees, but you can find financial planners who Assn. personal financial advisers, the XY planning network, the Garrett Planning Network and the Alliance of Global Planners.
Which vehicle (s) you use for cash will depend on your goals and how you want to distribute the funds over time. You will need good advice on how to invest, minimize taxes, and incorporate the money into your own estate plan. Distributing money to your grandchildren may trigger the need to file donation tax returns, although you don’t actually owe donation tax until you donate millions of dollars. .
Your son may have chosen you as a beneficiary because he trusted you to do good to his children. Or it may not have updated its beneficiaries since the policy request. (Several ex-spouses ended up with life insurance proceeds because the policy owner failed to update beneficiaries after the divorce.) It is a good idea to check the beneficiaries of any life insurance once a year or after any significant life. change to make sure the money always goes where you want it.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.