July 13, 2022

Employee Deferral vs. Roth Deferral: Which is Better for You?

There are a lot of decisions to make when it comes to saving for retirement, and two of the most important are whether to use a Roth or Traditional IRA, and whether to defer your income or contribute post-tax dollars. Here we’ll compare and contrast employee deferral vs. Roth deferral, so you can make the best decision for your unique circumstances.

What is a Roth Deferral

A Roth deferral is a type of retirement savings account that allows you to contribute after-tax income and withdraw the money tax-free in retirement. The main benefit of a Roth deferral is that it offers tax-free growth on your investment, which can lead to a larger nest egg in retirement. Compared to a traditional retirement account, such as a 401(k) or IRA, a Roth deferral also offers more flexibility in how and when you can access your money. For example, you can withdraw your contributions at any time without penalty, and you're not required to begin taking distributions until age 59 1/2. This can be helpful if you need to tap into your savings before retirement.

There are two main types of Roth deferrals: Roth 401(k)s and Roth 403(b)s. Roth 401(k)s are available through employers, while Roth 403(b)s are available to employees of certain tax-exempt organizations.

Overall, a Roth deferral can be an excellent way to save for retirement, but it's important to understand the rules and regulations before opening an account. Talk to a financial advisor if you have questions about whether a Roth deferral is right for you.

If your employer offers a Roth deferral option, you can sign up for it just like you would any other employer-sponsored retirement savings plan. You’ll typically be able to contribute a percentage of your income, up to the annual contribution limit set by the IRS.

The main difference is that, with a Roth deferral, you’ll be contributing after-tax dollars. This means you won’t get a tax deduction for your contributions, but you will be able to withdraw the money tax-free in retirement.

A Roth deferral is an investing technique in which you invest your money into a Roth account now and don’t pay taxes on the investment until you retire. This can be a great way to grow your money tax-free and have more money to live on in retirement.

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How to Set Up a Roth Deferral

First, you'll need to choose a Roth account provider. There are many different providers out there, so take some time to research and find one that best suits your needs.

Once you've found a provider, you'll need to open a Roth account with them. This usually requires filling out some paperwork and making an initial deposit.

Once your account is open, you can start making regular contributions to it. most providers allow you to set up automatic contributions from your checking or savings account, which can make it easy to stay on track with your investing goals. As your account balance grows, so will the potential tax-free growth of your investment. When you're ready to retire, you can begin withdrawing money from your account without having to pay any taxes on it. That's what makes a Roth deferral such a great way to save for retirement!

Fiat Wealth Management can set get this started for you today. Contact an advisor if you’re ready to make this commitment!

Possible Risks of a Roth Deferral

There are a few potential risks to consider before signing up for a Roth deferral.

Simply put, it's a type of retirement account that allows you to contribute after-tax money, which grows tax-free and can be withdrawn tax-free in retirement. Sounds great so far, right? And indeed, there are many advantages to investing in a Roth deferral. However, there are also some possible risks to consider before deciding to invest.

One potential risk is that your tax situation could change between now and retirement. If tax rates go up, you may end up paying more in taxes on your withdrawals than you would have if you had invested in a traditional retirement account. Another risk to consider is the possibility that Congress could change the rules governing Roth deferrals in the future. While this is unlikely, it's still something to keep in mind. Finally, if you need to take an early withdrawal from your Roth deferral, you may be subject to taxes and penalties. So while there are some possible risks associated with investing in a Roth deferral, there are also some significant potential rewards. As with any decision regarding your retirement savings.

What is an Employee Deferral

An employee deferral is a sum of money that an employee withholds from their paycheck and contributes to their retirement account. The most common type of employee deferral is a 401(k) contribution. Other types of employee deferrals include 403(b) contributions and 457(b) contributions. Roth deferrals are also popular, particularly among younger employees. Roth deferrals are made with after-tax dollars, which means that the money can be withdrawn tax-free in retirement. Employees can defer up to $18,500 per year in 2018, plus an additional $6,000 if they're over the age of 50. Employer matching contributions do not count towards this limit. Roth deferrals are an excellent way to save for retirement, and they can help employees reduce their tax burden in retirement.

What is the employee deferral limit?

The employee deferral limit is the maximum amount of money that an employee can contribute to a retirement savings plan, such as a 401(k) or 403(b). This limit is set by the Internal Revenue Service (IRS) and is adjusted each year for inflation. For 2022, the employee deferral limit is $20,500. Employees who are age 50 or older at the end of the year can make catch-up contributions of up to $6,500, for a total contribution of $27,000.

The employee deferral limit does not apply to employer contributions or to other types of retirement savings plans, such as IRAs. Roth deferrals are subject to the same employee deferral limit as traditional deferrals; however, catch-up contributions are not allowed for Roth deferrals. If you have questions about the employee deferral limit or other retirement savings topics, please contact a financial advisor.

Employee Deferral Vs Roth Deferral

There are two types of deferrals that employees can make to their retirement plans: employee deferrals and Roth deferrals. Both types of deferrals have their advantages and disadvantages, so it's important to understand the difference between them before making a decision.

Employee deferrals are made before taxes are withheld from your paycheck. This means that you'll pay less in taxes now, but you'll pay more in taxes when you withdraw the money in retirement. Roth deferrals are made after taxes are withheld from your paycheck. This means that you'll pay more in taxes now, but you won't have to pay any taxes on the money when you withdraw it in retirement

So, which type of deferral is right for you? It depends on your situation and what you're looking to achieve with your retirement savings. If you want to minimize your tax bill now, then an employee deferral may be the way to go. But if you're looking to maximize your tax-free income in retirement, then a Roth deferral may be the better choice. Ultimately, it's up to you to decide what's best for your unique circumstances.

Roth deferrals and employee deferrals are both popular options for saving for retirement. But which one is right for you? Here we’ve summarized the pros and cons of each so you can make an informed decision. If you’re ready to set up a Roth deferral or employee deferral, contact an advisor today. We can help you get started on the path to a secure retirement.

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This page is a publication of Fiat Wealth Management, LLC. The firm is registered as an investment adviser and only conducts business in states where it is properly registered/notice filed or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.

The information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation.

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