Strategies for Retirement Plans 401 K vs. IRA vs. Roth. Tax Compliance a& Planning. CPA TCP Exam

In this video, I discuss various retirement plan options or strategies such as when to choose 401 k plan versus Roth versus IRA as covered on the tax compliance and planning on the CPA exam.
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Understanding retirement plan options, such as 401(k) plans and IRAs, is crucial for effective financial planning. Let's break down and explain these concepts with examples.

Employer-Sponsored 401(k) Plans and Employer Match
Advantage: Many employer-sponsored 401(k) plans offer a matching contribution. For instance, if a plan matches contributions dollar for dollar up to $10,000, and you contribute $10,000, your employer will also add $10,000 to your account. This is essentially free money, doubling your investment.

Practice Example:

Employee Contribution: $8,000
Employer Match: 100% up to $10,000
Total in 401(k): $8,000 (Employee) + $8,000 (Employer) = $16,000
It's advisable to contribute at least enough to get the full employer match.

Traditional vs. Roth Accounts (401(k) or IRA)
Consideration: Choose between Traditional and Roth accounts based on your current and expected future marginal tax rates.

Traditional Account (401(k) or IRA):

Advantage: Tax savings are immediate; contributions are made pre-tax.
Best When: Your current marginal tax rate is higher than what you expect it to be in retirement.
Practice Example: If you're currently in a 25% tax bracket and expect to be in a 15% bracket in retirement, a Traditional account lets you save on taxes now.
Roth Account (401(k) or IRA):

Advantage: Tax savings are in the future; qualified distributions are tax-free.
Best When: Your current marginal tax rate is lower than what you expect it to be in retirement.
Practice Example: If you're currently in a 12% tax bracket but expect to be in a 22% bracket in retirement, a Roth account allows you to pay taxes now at a lower rate.
Roth IRA: No Required Minimum Distributions (RMDs)
Advantage: Unlike other retirement accounts, Roth IRAs do not require you to start taking distributions at a certain age, allowing for continued tax-free growth.

Practice Example:

Age: 72
Account: Roth IRA
Situation: You can choose to leave the funds in the account for further growth, without mandatory withdrawals, which is not an option with traditional retirement accounts.
Summary
Employer-Sponsored 401(k): Contribute enough to get the full employer match.
Traditional vs. Roth: Choose based on your current vs. future tax rates.
Roth IRA: Offers the unique advantage of no required minimum distributions.
By understanding these differences and choosing the right type of account based on your individual tax situation, you can maximize your retirement savings and benefits.









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