Benefits of a traditional 401(k)

A traditional 401(k) plan is an excellent vehicle for retirement savings—particularly if your company offers a matching or partially matching contribution.

• Contributions are typically withdrawn automatically from your earnings each paycheck and deposited in your account, so you pay yourself first.
• 401(k) plans are generally funded with pre-tax contributions, which typically lower your current year’s taxable income—a benefit at tax time.
• 401(k) withdrawals in retirement are typically taxed.

Benefits of a Roth IRA

Adding a Roth IRA account to your retirement portfolio provides benefits not available with a traditional 401(k) plan.

• While a Roth IRA doesn’t provide a tax benefit for the current year, any earnings on your contributions grow tax-deferred, and you have the benefit of tax-free withdrawals later if you meet the requirements for a qualified distribution.[2]
• While you won’t be able to contribute as much to a Roth IRA as you would to a 401(k), over the years, your Roth IRA contributions could add up to supplement your 401(k) savings.

Differences between a Roth IRA & 401(k)

While the primary benefit of adding a Roth IRA to your investment portfolio is the potential for building a bigger retirement plan, there are other things to consider when pairing a Roth IRA with your 401(k):

• Investment choices
  The investment options available within an employer-sponsored 401(k) plan are generally determined by the employer. With a Roth IRA, you may have the flexibility to choose how you want your assets invested to best fit your financial goals.

• You can choose between taxable and tax-free withdrawals
  If you have both a Roth IRA and 401(k), you may have more control over your tax situation (particularly prior to age 73). For instance, if you want to minimize your taxes during a particular year, you may be able to take more money out of your Roth IRA. Roth IRA contributions may be withdrawn at any time and, if your account has been open for at least five years, your earnings may also be withdrawn tax-free after you turn age 59½. If you take a distribution before age 59½, you would normally be subject to income taxes and a 10% early distribution penalty on the earnings, although certain exceptions apply. The 10% may not be imposed if the following conditions apply, see Exceptions to tax on early distributions for more information.

Once you are required to start taking RMDs from your 401(k), if you don’t require income in addition to your RMD amount, you may wish to limit your withdrawals from your Roth IRA. This allows your Roth IRA to potentially continue growing tax-free.

• Roth IRA funds are available for other uses
  You can use Roth IRA contributions to fund other life milestones, such as:
  • Education expenses for your children
  • Down payment on a home
  • Unexpected family emergency―even before you turn age 59½. Your contributions (not earnings) can be withdrawn from your Roth IRA at any time for any reason―federal tax and penalty free.

If you meet certain requirements, you can withdraw your earnings from your Roth IRA. These requirements ensure your withdrawal is considered a qualified income tax-free distribution. 

• Roth IRAs have no upper age restrictions
  You can continue contributing to a Roth IRA regardless of your age, as long as you or your spouse have sufficient earned income to cover the contribution.

• Roth IRAs have no required minimum annual distributions
  Unlike traditional IRAs or 401(k) plans, which require you to take minimum distributions starting at age 73, you are never required to take a distribution with a Roth IRA. Your beneficiaries, however, must take required minimum distributions (RMDs). They would typically receive the distributions as qualified tax-free distributions, provided you established the Roth IRA at least five years before your death.

• Roth IRA limitations
  The maximum annual contribution allowed for Roth IRAs, traditional IRAs or a combination of both is $6,500 for tax year 2023 and $7,000 for tax year 2024. (If 50 and older, $7,500 for 2023 and $8,000 for 2024.)
  

Even if you contribute the maximum amount to a 401(k), you can still contribute to a Roth IRA in the same year, unless your income exceeds the eligibility limit.

Taking advantage of both a Roth IRA paired with your traditional 401(k) could be a helpful step in your retirement planning.

If you don’t have a 401(k) at work, you could get started investing some of your earnings in a Thrivent Mutual Funds traditional IRA or Roth IRA.[4]

¹ Nova, Annie. “Many younger baby boomers may outlive their 401(k) savings, new research finds. Here’s why.” CNBC. 2022. www.cnbc.com/2022/06/19/401k-plans-may-not-last-long-enough-in-retirement.html (Feb. 1, 2024).

² Requirements for qualified distributions can be found in detail in IRS Publication 590-B.

³ Participants could delay their RMDs if they are still working and not a 5% owner of the business if plan allows