What’s the difference between a Roth IRA and a 401(k) ?

by Justin Weinger on June 3, 2013

Experts will tell you that if you want to save the most money on gasoline you need to drive a highly efficient automobile. When it comes to retirement savings the idea is very similar. You need to choose the best retirement plan to get you where you want to go, one that is highly efficient and will not only grow your money but protect it from taxes. If you are a savvy consumer and you’ve made the commitment to save at least 10% of your salary for retirement there are two ‘vehicles’ that you should definitely look at and they are the 401(k) and the Roth IRA. Both will get you where you’re going (retirement with minimal stress) but one may fit your lifestyle better than the other. This blog will help you determine which is best for you. Enjoy.

One of the best places to jumpstart your retirement savings is with a 401(k), especially if your employer is offering to match your savings. With the $17,500 ceiling that has been established for 2013 the 2% to 6% match that your company will provide you is money that you just can’t afford to leave on the table.

Another reason to love your 401(k) plan is that most employers make it very easy to fund with automated payroll reductions. Any financial expert will tell you that the easier your savings plan is for retirement the more likely that it will succeed. Having money automatically taken out of your paycheck every week is about as easy as it gets.

There are many 401(k) plans that are now offering a Roth 401(k) as well and this may be one of the best upgrades for you depending on a number of variables (see below). With a Roth 401(k) you will pay taxes upfront on your retirement savings but you will avoid future taxes on them, a fact that could save you thousands of dollars. Most experts will tell you that a Roth 401(k) is good for you if;

  • You are at present a younger person and earning less than you probably will be in the future.
  • You’re and excellent saver and will more than likely have a large amount of money waiting for you in retirement.
  • You are willing to pay a little bit more now in order to have tax-free income later.

Simply put, if the company you’re working for it does not offer a match in your 401(k) or if you’re already maxed out this option and are keen on saving more, you should consider a Roth IRA. They actually provide a bit more flexibility than a 401(k) since you can access your principal anytime you like without incurring any penalties. When you further consider that you will need to take out a loan if you need money before you retire because taking money out of your 401(k) plan is restricted, a Roth IRA looks like a better  choice.

Roth IRAs  also have  a number of provisions for first-time homebuyers and also college tuition costs. Simply put, many people who are investing in their retirement like the Roth IRA because of its increased flexibility and also its lower fee structure. The fact is however that, with either the Roth IRA or the 401(k), you will be able to store your retirement money in an account where it should never be taxed again.

One last note to keep in mind is that you should definitely have a fully funded emergency reserve account before you start completely focusing on your retirement savings plans. Most experts will tell you that you need at least six months’ worth of living expenses in a ‘liquid’ account ( this means being able to get money in cash directly) in order to cover you if something unexpected happens.

Of course the best way to begin planning your retirement is to talk to a qualified financial advisor first. No matter what you do  it is an excellent idea to start your retirement savings funds as early as possible so that you can take advantage of the power of compound interest. Saving for retirement may not be all that glamorous but, when the day arrives that you are ready to say goodbye to the rat race, you’ll be glad you started early.


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