Should you Use a Roth IRA or a 401K?

Should you Use a Roth IRA or a 401K?

Posted on 20. Jan, 2011 by in Retirement

A Roth IRA and a 401K are two popular tax-advantage retirement accounts. Tax-advantage accounts are benefits from the government. In some way or another, money doesn’t get taxed, which puts more money in your pocket. The money isn’t available until after a certain age, except with a tax penalty. Which should you choose?

What is a Roth IRA?

With a Roth IRA, you can contribute a certain amount of money each year. You pay taxes on the contributions now, but when you make a Roth IRA withdrawal after retirement, you don’t have to pay taxes, not even on the earnings. This is great if you are in a low tax bracket now, or it’s beneficial for the fact that we don’t know what taxes will be later. The tax rates could be higher. Either way, not paying taxes on earnings is a big benefit.

What is a 401K?

With a 401K, you can contribute up to a certain amount of money each year as well. These contributions go into your account tax-free. This means that they money that would have otherwise gone to taxes is collecting earnings instead. After retirement, you can withdraw the money, but you have to pay taxes on all of it.

The biggest benefit to 401Ks is that you can get an employer match. Some employers will match all or some of your contributions. Not all employers will do this, but if you get an employer match, you should first max out your 401K to get all of those benefits.

After you’ve maxed out your 401K, invest in a Roth IRA. A Roth IRA has a benefit that you can choose whatever mutual fund you want to invest in whereas with a 401K , it’s decided by your company. Ultimately, if you don’t get a match, go with an IRA. If you do get a match, go with the 401K first.

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