Today we’re going to dive into five major differences between Roth IRAs, Traditional IRAs, and 401ks. This video is for my American viewers that wanted a US version of my recent RRSP and TFSA comparison video.

If you would like to skip ahead, here are the major differences between Roth IRAs, Traditional IRAs, and 401ks;

0:59 Tax treatment
1:58 Contribution limits
2:33 Required minimum distributions
3:19 Employer involvement
3:55 Eligibility rules

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When it comes to saving for retirement, there are several options available to individuals, including IRA, Roth IRA, and 401(k) accounts. Each of these accounts has its own set of rules, advantages, and disadvantages. Understanding the differences between them can help individuals make informed decisions about their retirement savings.

1. Tax Treatment:
One of the main differences between IRA, Roth IRA, and 401(k) accounts is the way they are taxed. With a traditional IRA and 401(k), contributions are made on a pre-tax basis, which means that the money is deducted from your income before taxes are calculated. This reduces your taxable income in the year of the contribution, providing a tax benefit. However, withdrawals from these accounts in retirement are subject to income tax. On the other hand, contributions to a Roth IRA are made with after-tax dollars, meaning there is no immediate tax benefit, but withdrawals in retirement are tax-free.

2. Income Limits:
Another key difference is the income limits for contributing to these accounts. Traditional IRAs and 401(k) accounts have no income limits, meaning anyone can contribute regardless of their income level. However, Roth IRAs have income limits, and individuals above a certain income threshold may not be able to contribute to a Roth IRA at all, or may be limited in the amount they can contribute.

3. Contribution Limits:
Each type of account also has its own contribution limits. For traditional and Roth IRAs, the maximum contribution limit is $6,000 in 2021, with an additional $1,000 catch-up contribution allowed for individuals aged 50 and over. 401(k) accounts, on the other hand, have a much higher contribution limit of $19,500 in 2021, with an additional $6,500 catch-up contribution allowed for those aged 50 and over.

4. Withdrawal Restrictions:
There are also differences in the withdrawal rules for these accounts. With traditional IRAs and 401(k) accounts, there are penalties for withdrawing funds before the age of 59 ½, and withdrawals are subject to income tax. Roth IRAs, however, allow for penalty-free withdrawals of contributions at any time, and earnings can be withdrawn tax-free in retirement as long as certain conditions are met.

5. Employer Involvement:
Finally, 401(k) accounts are typically employer-sponsored plans, meaning they are set up and managed by an employer, and often come with matching contributions. Traditional and Roth IRAs are individual accounts that can be set up and managed by the individual outside of an employer-sponsored plan.

In conclusion, the main differences between IRA, Roth IRA, and 401(k) accounts revolve around tax treatment, income limits, contribution limits, withdrawal restrictions, and employer involvement. It’s important for individuals to weigh these differences carefully and consider their own financial situation and retirement goals when choosing the right retirement savings vehicle. Consulting with a financial advisor can also provide valuable guidance in making this decision.