It's important to save for retirement, but most people only have so much money to set aside. If you have to choose between maxing out your 401(k) and contributing to a Roth IRA, how do you decide which is the better choice?
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the differences between 401(k)s and Roth IRAs. Dan notes that traditional 401(k)s let you exclude income from tax currently, but you have to pay tax on withdrawals in retirement. By contrast, Roth IRAs give you no tax deduction but also charge no tax on retirement withdrawals. Dan suggests looking at your current tax rate, and if it's higher than your tax rate is likely to be in retirement, then maxing out your 401(k) is often the better choice. If it's lower than your rate in retirement will be, then a Roth typically makes more sense.
Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.