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Two of the most popular retirement accounts are the Roth IRA and the 401(k). The biggest difference between a Roth IRA and a 401(k) is that anyone with earned income can open and fund a Roth IRA, but a 401(k) is available only through your workplace. This article will help you weigh the pros and cons of each and determine which plan is best for you.
Deciding between a Roth IRA and a 401(k) comes down to personal circumstances.
A 401(k) is a good option for those with an employer match, low fees in their plan, and who expect their effective income tax rate in retirement to be less than their marginal tax rate today. The 401(k) contribution limit can't be beat either. Be sure to review your investment options in the 401(k) plan to ensure you're not paying too much in fees and that you're investing in the funds that will work best for you.
If your employer doesn't offer a 401(k) plan, a Roth IRA is an excellent alternative. You may consider a Roth IRA even if your employer offers a 401(k) because of the minimal fees and greater investment and withdrawal flexibility.
Importantly, you don't have to choose between the two. You can contribute to both a 401(k) and a Roth IRA. Even if the fees on your 401(k) are high, it's worth contributing at least enough to get the full employer match, which will more than offset the additional costs of a 401(k).
Contributing to both will also diversify the tax treatment of your withdrawals in retirement since 401(k) withdrawals incur taxes but Roth IRA withdrawals don't. That gives you additional control over your tax rate in retirement, allowing you to minimize how much you pay the government.
Understanding the benefits and drawbacks of each retirement account can help you make the best decision for your future.
With a 401(k) plan, retirement savings are taken straight from an employee's paycheck and put into a 401(k) account. A 401(k) offers several advantages:
But 401(k) plans often come with a few drawbacks as well:
You don't need a special plan from your employer to save for retirement using a Roth IRA. The retirement savings account is available to anyone with earned income. You can simply open an account at any financial institution and contribute directly from your checking or savings account.
Here are some of the biggest advantages of a Roth IRA:
There are some negatives to a Roth IRA as well:
