Roth IRA vs. 401K

Both the Roth IRA and the 401K are both great tax-advantaged tools that will help you save for retirement.  Which one is best for you is really going to depend on your current situation.  It is to your advantage to get started with one or the other as soon as possible. Let’s take a look at both of them, and see what we come up with. 

Here are some facts related to the Roth IRA.  Bear in mind that the contribution limits can be changed.

Contributions are After-Tax

Annual Contribution Limit is $5,000

Contributions Limited Based on Income

Withdraw Contributions at Any Time without Penalty

No Mandatory Withdrawals

Very Flexible

Now, let’s look at a few facts that pertain to the 401K. 

Contributions are Pre-Tax

Annual Contribution Limit is $5,000

Contributions Limited Based on Income

Withdraw Contributions at Any Time without Penalty

No Mandatory Withdrawals

Very Flexible

In the end, the biggest advantage that the 401K has is the tax deferral. You can contribute $16,500 per year, and you don’t have to pay taxes on it until you pull the money out. For instance, if you have a corporate job that pays a bunch of money and has you in a high tax bracket, odds are you won’t be in this tax bracket when you retire. This means less tax.  With a Roth, if you are poor now, and plan on being rich in retirement, then that’s the plan for you.

Why not use both? It is legal to use both types of retirement plans at the same time and work them both to your advantage.  The plan would be to invest in your 401K to get your company to match your contributions. Then head over and max out your Roth IRA. After that, go back to your 401K and max that out.  This is will give you great diversification in regards to your retirement accounts.