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What’s a Roth IRA? How to pick the best retirement account

Dear Liz: Can you explain the difference between a Roth IRA and a Roth 401 (k)? What are the benefits of Roth 401 (k)? My company is offering this and I am thinking of starting to make deferred contributions there, continuing my 401 (k) contributions.

Answer: Contributions for the Roth IRA and Roth 401 (k) s are after tax, meaning you will not receive a tax deduction in advance as is the case with traditional IRA and 401 (k) accounts. Money grows with tax deferral and in retirement can be tax-free.

You usually open and contribute to the Roth IRA at a brokerage house, which gives you access to a wide range of investment options. Just like traditional 401 (k) accounts, the Roth 401 (k) s is offered by the employer, usually with a limited number of investment choices.

Roth 401 (k) allows people to contribute significantly more than they could to Roth or traditional IRAs. Roth 401 (k) also allows contributions from those earning more who may not be included in the Roth contribution to the IRA.

Roth IRA’s contributions are limited to $ 6,000, and the reimbursement contribution is $ 1,000 for people over the age of 50. Your ability to contribute begins to be phased out with certain income limits. This year’s phasing-out begins with $ 125,000 of modified adjusted gross income for individual files and $ 198,000 for married couples filing together.

The Roth 401 (k) s has no income limit and allows you to contribute as much as $ 19,500 ($ 26,000 for those over 50). This is a combined limit for election delays from your salary. For example, if you are under 50 and contributing $ 10,000 for the pre-tax portion of 401 (k), you can add up to $ 9,500 for the Roth option.

The Roth IRA and Roth 401 (k) s also have different withdrawal rules. You can remove your contributions from the Roth IRA at any time without paying taxes or penalties. Withdrawing money from a Roth 401 (k) before age 59 can also bring taxes and penalties, although you usually have the option of taking out a loan.

Also, you are not required to start withdrawing payments from the Roth IRA at age 72, as is the case with other retirement accounts, including the Roth 401 (k). You will have the option of introducing a Roth 401 (k) into the Roth IRA, usually after you leave work, so that you can avoid the minimum necessary distributions.

Sudden death brings a dilemma

Dear Liz: My son passed away suddenly and his million-dollar life insurance policy was granted to me, his mother. I want the money to be shared equally between his two children for future use. This may interest you : Evolving IRA Distribution Rules Complicate Planning. They are now 18 and 15 years old. What financial means should I use? The funds are in my money market account and just waiting to be put into them.

Answer: Use a portion of the money to pay for individual advice from advisors who are trustees. Fiduciary means that the counselor is obliged to put your best interests first. Most advisors are not fiduciaries, but you can find financial planners who have gone through this National Assn. personal financial advisors,, XY network planning, the Garrett’s planning network i Alliance of Comprehensive Planners.

The vehicle or vehicles you use for the money will depend on your goals and the way you want to allocate funds over time. You will need good advice on how to invest, minimize taxes and incorporate money into your real estate plan. Sharing money with your grandchildren may trigger the need to file a gift tax return, even though you wouldn’t actually owe gift tax until you donated millions of dollars.

Your son may have chosen you as his user because he believed you would do good to his children. Or he may not have updated his users since he signed up for the policy. (More than a few ex-spouses ended up with life insurance income because the policyholder did not update beneficiaries after the divorce.) It is a good idea to check beneficiaries of any life insurance once a year or after any major life change to make sure money continues goes where you want.

Liz Weston, a certified financial planner, is a columnist for personal finance NerdWallet. Questions can be sent to her at 3940 Laurel Canyon, no. 238, Studio City, CA 91604, or using the “Contact” form at asklizweston.com.

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