Roth IRA vs 401k
One of the most important aspects of overall financial health is saving for retirement. Due to its importance, several retirement plans have been introduced that incentivize people to save for retirement. Roth IRA and 401ks each allow their investors to experience portfolio growth on a tax free basis, which makes the account very popular retirement vehicles. When deciding between a Roth IRA vs 401k, you should take into consideration all the differences between the two.
The largest difference between a Roth IRA and a 401k are taxes. A 401k is funded with pre-tax dollars while a Roth IRA is funded with after tax dollars. This means that a person with a 401k could fund their retirement account without having to pay any taxes on the contributions. However, when retirement comes and you look to withdraw funds from your retirement accounts, withdrawals from the 401k will be taxed while withdrawals from the Roth IRA will not. Therefore, if you feel you will be in a higher tax bracket upon retirement, a IRA will be the better choice. If you will be in a lower tax bracket upon retirement, the 401k will be the better choice.
Another large difference between a Roth IRA and a 401k are the contribution limits. A 401k allows annual contributions of up to $16,500, or $22,000 for those over 50 years of age. On the other hand, a Roth IRA only allows for annual contributions of $5,000, or $6,000 for someone over the age of 50. Furthermore, many 401k accounts are employer sponsored and come with additional employer matches. The employer match, which is normally a dollar for dollar contribution up to a certain percentage of the employee’s salary, is essentially limitless.
The third difference between a Roth IRA and a 401k are the income limits. A 401k retirement account is available to anyone, regardless of their income. On the other hand, a Roth IRA is not designed for the extremely wealthy. A Roth IRA is not available to those individuals with an adjusted gross income of $110,000 or more. Married couples with a combined adjusted gross income of $160,000 are also ineligible for Roth IRA contributions.
In conclusion, due to the fact that each account allows for tax free growth, a Roth IRA and 401k are both excellent retirement vehicles. However, there are several differences between the two account which should be taken into consideration when deciding which account to open.
RSS Feed
Email
It’s totally OK to open both, right? =) I figured my employer can help me contribute to my 401(k) as I will contribute up to the max they will match and then the rest of my retirement savings I can put into a Roth.
I thought it was fairly common for people to have both but was wondering if others out there did?
Hells yeah! All the cool kids use both.
I’ve wondered why so few “experts” and even bloggers have talked about having both, especially since the new laws regarding Roth conversions took hold. Everyone seems to be Roth conversions, but there are huge fees and tax costs associated with a conversion. It just makes more sense to me to start a Roth and leave the traditional IRA or 401k grow… I plan on tapping that first due to the required minimum distributions, and leave the Roth for later in life or (God willing) my descendants!
Great points AA! Another point to add: Choices. With ROTH, you can decide how and where to invest. With 401K, you are pretty much stuck with what your employer provides. I cringe when I see some of the ERs on my 401K investment choices!
Having both is the way to go – diversify your tax situation – and hedge your bets!
With the increasing deficits, it is important to realize that taxes will ultimately rise. Funding a Roth will help to hedge against these future increases.
For those who have children, your Roth can be passed to your heirs tax free. The 401k requires manditory distributions once you reach 70. Contributions can be withdrawn from a Roth without penalty, though a 401k must be paid back through a loan.
The best option is actually to do a Roth 401k, if your employer has that option. Matching contributions are always made into a traditional 401k though.