401k Versus Roth IRA
401K versus Roth IRA, who wins? What is a better investment option? They both have their advantages and disadvantages.
Below we will look at these advantages so that you can get an idea of what works best for your specific needs.
401K Advantages, 401k vs Roth IRA
The 401k has 5 major advantages over the Roth IRAs.
1. Higher Contribution Limit
The 401k allows you to save up to $17,500 a year compared to $5,500 with the Roth IRA, after a few years of contributing this can lead to a large gap between the amount you would be able to save under each plan.
2. Employer Contribution
The biggest benefit of 401k plans is that some employers will actually help you save your money. For instance, if your employer matches 50% of your investment and you invest the full $17,500 into it every year, that is an extra $8,250 free dollars you receive which can be invested for retirement.
3. No Taxes Now
If you have a high tax bracket you may not want to pay taxes on it today. Instead you can decide to save it up and pay taxes on it in the future when your tax bracket may be lower.
4. Lowering your tax bracket
A nice thing about 401ks is that they can help put you into a lower tax bracket. Because any money you invest into a 401k is not considered income you may be able to lower your tax bracket on the rest of your income and therefore pay a smaller percentage of your earnings to the “Taxman” every year.
Unlike IRAs, 401ks are automatic. Instead of having to manually deposit money into the account you can simply have it taken out of your paycheck every month, you don’t even have to think about it.
Roth IRA Advantages, 401k vs Roth IRA
Even though 401ks do have some pretty big advantages, there are still 3 reasons why Roth IRAs can be a better investment.
1. You Are Taxed Later
If you are in a lower tax bracket now and think your taxes will increase in the future this can be a better option. You basically get it out of the way. After age 59 ½ and provided you hold the account for at least 5 years you can take the money out without paying any fees or taxes on it or the interest that you make .
2. More Options
Roth IRAs allow you more options to invest. Normally a 401k will either invest your money for you, or they will allow you to pick which mutual funds will invest your money. Roth IRAs on the other hand give your more control, depending on the plan you can choose to invest in mutual funds, stocks, or even real estate.
3. Take Money Out Early
Retirement planning is great, but what if you need to take money out early? A Roth IRA can help you with that. Any money that you invest into a Roth IRA can be taken out free of penalty at whatever time you want it.
As long as you don’t take out any of the interest that you made on the money, you are able to take it out whenever you want. This means your IRA retirement account can double as an emergency account.
What is better a 401k or a Roth IRA,401k Versus Roth IRA?
So, what is better a 401k or a Roth IRA, 401k Versus Roth IRA? Well it may depend on your situation, If you think your taxes will increase later on a Roth IRA may be better, if not a 401k may be better for you.
Can I Contribute to Both A 401k and a Roth IRA?
Perhaps the best plan is to invest money into both plans. Since you are able to contribute to both at once there is no reason why you can’t get the best of both worlds. It also increases the amount that you can save in general.
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