- Who Can Contribute: Anyone with earned income below certain limits. (Eligibility for tax deductions depends on income and workplace retirement plan participation).
- What is Earned income?
- Earned income, as defined by the IRS, refers to the money you receive for work you perform. It includes all the taxable income and wages you get from working for someone else, yourself (if you're self-employed), or from certain disability payments.
- Tax Treatment:
- Contributions may be tax-deductible.
- Earnings grow tax-deferred.
- Withdrawals are taxed as ordinary income.
- Contribution Limits (2025): $7,000 (under 50) / $8,000 (50+).
- Required Minimum Distributions (RMDs): Start at age 73.
- Flexibility:
- Wide range of investment options, including alternative assets (e.g., real estate, promissory notes) in Self-Directed IRAs (SDIRAs).
- Who Can Contribute: Employees of companies offering a 401(k) plan, as well as self-employed individuals through a Solo 401(k). Mountain West IRA provides administration for Solo 401(k) plans, offering flexible options for self-employed professionals to take control of their retirement savings.
- Tax Treatment:
- Traditional 401(k): Contributions reduce taxable income; earnings grow tax-deferred; withdrawals are taxed as ordinary income.
- Roth 401(k) (if offered): Contributions are after-tax, but withdrawals are tax-free if qualified.
- Employee Contribution Limits (2025): $23,500 (under 50) / $31,000 (over 50) / $34,750 (age 60 to 63).
- Employer Match: Many employers match a percentage of contributions, essentially “free money.”
- RMDs: Start at age 73 (not required for Roth 401(k)s).
- Investment Options: Typically limited to the employer’s selected funds, but Self-Directed Solo 401(k)s allow for greater diversity of assets.
- Who Can Contribute: Anyone with earned income below certain limits (2025 Phase-Out: $150,000–$165,000 for single filers; $237,000–$246,000 for joint filers).
- What if you make too much to directly contribute to a Roth IRA is:
- One strategy to consider is the Backdoor Roth IRA. This involves making a non-deductible contribution to a Traditional IRA and then converting those funds to a Roth IRA. It can be a useful option for high-income earners who exceed the income limits for direct Roth IRA contributions
- Tax Treatment:
- Contributions are after-tax (no immediate deduction).
- Earnings grow tax-free.
- Qualified withdrawals are tax-free.
- Contribution Limits (2025): $7,000 (under 50) / $8,000 (50+).
- RMDs: None during the account holder’s lifetime.
- Flexibility:
- Can withdraw contributions (not earnings) tax and penalty-free at any time.
- Wide investment options in Self-Directed Roth IRAs (SDIRAs).
Choosing the Right Option
- Traditional IRA: Great for reducing taxes now and for those without access to a workplace plan.
- 401(k): Ideal if your employer offers a match or you’re self-employed and need high contribution limits.
- Roth IRA: Best for those expecting higher taxes in retirement or looking for tax-free growth and withdrawals.
Conclusion
When deciding between a Traditional IRA, 401(k), and Roth IRA, it’s important to consider your current financial situation, tax strategy, and long-term retirement goals. Each type of account offers unique benefits, from tax-deferred growth to tax-free withdrawals, and they can complement one another in building a diversified and well-rounded retirement plan.
For those interested in greater flexibility and investment opportunities, options like Self-Directed IRAs or Solo 401(k)s allow for alternative assets such as real estate or promissory notes. However, retirement planning is not one-size-fits-all; the right choice depends on your circumstances and choices.
Before making any decisions, consult a qualified financial planner or tax professional to ensure your strategy aligns with your financial goals, tax situation, and retirement timeline. Their expertise can help you make informed choices and maximize the benefits of these retirement accounts while avoiding potential pitfalls.
Ready to take control of your retirement strategy?
At Mountain West IRA, we specialize in Self-Directed IRAs that give you the power to invest beyond the stock market—into real estate, private loans, precious metals, and more. Whether you're considering a Traditional or Roth IRA, we can help you understand your options and answer any questions you may have.
📞 Call us at 866-377-3311 or
📅 Schedule a free consultation today to get started!
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