Roth retirement accounts for the win

Millions of Americans have various retirement accounts available to us — most typically, IRAS and/or 401(k)s. Both of those come in two main varieties — traditional and Roth. It’s valuable to understand the difference, as one kind of account may serve you much better than the other.

Traditional IRAS and 401(k)s offer upfront tax breaks; you fund them with pretax dollars. So, for example, if you contribute $6,000 to your traditional IRA, your taxable income shrinks by $6,000, and you avoid paying taxes on it in the year of your contribution. If your tax bracket is 24 percent, you’d save $1,440 — 24 percent of $6,000. The money in your account is eventually taxed, though, when you withdraw it.

With Roth IRAS and 401(k)s, you get no upfront tax break; you contribute post-tax dollars. So if you sock away $6,000 into a Roth IRA, it doesn’t affect your taxable income. But if you follow the rules, you’ll eventually be able to withdraw funds from your Roth accounts tax-free. That can be a big deal. If you contribute regularly (and, ideally, generously) to Roth accounts for many years and your investments do well, you can end up with hefty nest eggs at retirement that you can tap without taxes.

Roth accounts can be good for those who have many years in which to grow their accounts — and for those who expect to be in higher income tax brackets in retirement.

It’s too late to make a 2022 contribution to your 401(k), but 2022 contributions can be made to IRAS until the deadline for tax returns, which is April 18 in 2023. IRA contribution limits for 2022 are $6,000, plus a $1,000 “catch-up” contribution for those 50 or older. Those limits are $6,500 plus $1,000, respectively, for 2023. For 401(k) accounts, the contribution limits are much more generous — $22,500 in 2023, plus an additional $7,500 for those 50 and older, totaling $30,000 for 50-somethings and older folks.

Learn more about retirement topics via our “Rule Your Retirement” service at Fool.com/services.