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Roth IRA vs. Pre-Tax Acounts

You’re ready to open a retirement account, but you’re not sure which option to choose: a Roth IRA (Individual Retirement Account) or a pre-tax account, like a 401(k) or Traditional IRA.

For most individuals, choosing a retirement plan will have tax implications, so it’s important to make the best decision for your financial needs. Read on to learn more about pre-tax and after-tax savings.

Roth IRA Vs. Pre-Tax Accounts

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The key difference between Roth products and pre-tax plans is whether your earnings have been taxed as income before they are put into the account.

As the term pre-tax suggests, 401(k)s are funded with money taken from your paycheck before you pay taxes on it and contributions to Traditional IRAs are potentially able to be deducted from your taxable income. Roth products are funded with post-tax (also called after-tax) dollars, meaning you’re contributing money after you have paid income tax on it.

Each product has different implications for your tax liability. Understanding their different benefits and restrictions is important in deciding which plan is best for you.

Synchrony Bank does not provide tax advice so be sure to contact your tax advisor or financial consultant before opening or contributing to an IRA.

How Do Pre-Tax Plans Work?

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While there are a variety of retirement plans, the most common plans using pre-tax dollars are the 401(k) and the Traditional IRA.

A 401(k) is an employer-sponsored product that allows employers to offer matching contributions as a benefit to their employees. While 401(k)s can only be opened through employers, IRAs can be opened by anyone regardless of age, as long as you have an income.

There are different contribution and deductibility limits and regulations for each type of plan. However, because pre-tax dollars are generally used to fund both accounts, your taxable income for the year you contribute may be lowered—meaning you’ll likely pay less in income tax.

While you can contribute pre-tax income to an a 401(k) and IRA, you will have to pay taxes once you start taking the money out in retirement, including taxes on earnings and interest.

How Do Roth Plans Work?

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Contributions to a Roth 401(k) and Roth IRA are made with after-tax dollars. While they don’t result in an immediate tax benefit, the advantage of Roth products is that contributions are not taxed at distribution—meaning you’ll enjoy a source of tax-free income in retirement.

As with the pre-tax products, there are restrictions and limitations on both Roth products. 

Retirement Savings Options for You

Whether you choose Roth or pre-tax accounts, making early, consistent contributions to your retirement account is a great way to ensure a comfortable retirement.

Synchrony Bank offers a range of financial products, including IRAs that feature competitive rates+, award-winning customer service and easy online access.

Call 1-844-345-5789 today to learn about Synchrony Bank’s savings products to prepare for your retirement today.

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Sources:

IRS: https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras-1

IRS: https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans-1

+National Average APYs are based on specific product types of top 50 U.S. banks (ranked by total deposits) provided by Informa Research Services, Inc. as of 11/01/2016. CD Rates: Average APYs are based on certificate of deposit accounts of $25,000. Money Market Account Rates: Average APYs are based on Money Market Accounts of $10,000. Although the information provided by Informa Research Services, Inc. has been obtained from the various institutions, accuracy cannot be guaranteed.


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