Monday, December 10, 2018


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Shave down your tax bill in the future by funding these two savings accounts in the present.

But not all retirement accounts are the same

Say hello to the Roth 401(k) and the Roth IRA — two savings accounts that allow you to put away after-tax dollars and draw down income free of taxes in retirement.

Having a combination of tax-free, tax-deferred and taxable accounts in retirement is ideal because you can adjust your retirement income and manage your taxes.

“It’s a sweet deal to be able to set aside after-tax contributions,” said Lazetta Rainey Braxton, certified financial planner and founder of Financial Fountains in Baltimore.

Here’s what you should know.

Roth IRA

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In 2019, the IRS will permit savers to put away up to $6,000 in a Roth IRA, plus $1,000 if you’re 50 or older.

The exact amount of money you can save in this account will be based on your modified adjusted gross income or MAGI.

If you’re single and with an MAGI of up to $122,000 (or married-filing-jointly with up to $193,000 in MAGI), you can contribute up to the annual limit.

Contribution levels drop off from that point. Single filers with at least $137,000 in MAGI ($203,000 if married and filing jointly) can’t make any direct contributions to their Roth IRAs.

High earners who are over those income thresholds can try a backdoor Roth contribution.

In this case, they would make a nondeductible contribution with after-tax dollars to a traditional IRA and convert it to a Roth.

This move isn’t for amateurs. Work with your accountant when opting for a backdoor Roth contribution to make sure you don’t accidentally trigger income taxes.

Roth 401(k)

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About 7 in 10 employers offer a Roth 401(k), according to a Willis Towers Watson survey of 349 large and midsize U.S. companies.

Unlike your traditional 401(k), you’re paying taxes in the present as you contribute to your Roth 401(k).

Savers who want to participate aren’t subject to caps on their MAGI, which is one major difference between Roth IRAs and Roth 401(k) plans.

Be sure to coordinate your Roth 401(k) and traditional 401(k) contributions: In total, you may save up to $19,000 in 2019, plus $6,000 if you’re 50 and over.

Two tests

You can withdraw your actual contribution from a Roth IRA at any time.

This isn’t the case with a Roth 401(k). If you try to make an early withdrawal, your distribution will contain a combination of contributions and taxable earnings, plus a 10 percent penalty.

You need to meet two tests in order to take tax-free distributions of earnings from your Roth accounts.

First, you must have held the account for at least five years.

Second, the distribution must be made after you’ve turned 59½. Withdrawals due to death or disability are also tax-free, as long as the account meets the five-year test.

Be aware that while your Roth IRA is exempt from required minimum distributions — the mandatory withdrawals you must take after you turn 70½ — your Roth 401(k) is still subject to RMDs, according to the IRS.

More from Personal Finance
What stands in the way of saving for retirement?
These 2018 tax breaks are now up for debate
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