Roth IRA vs 401k

One of the most important aspects of overall financial health is saving for retirement.  Due to its importance, several retirement plans have been introduced that incentivize people to save for retirement. Roth IRA and 401ks each allow their investors to experience portfolio growth on a tax free basis, which makes the account very popular retirement vehicles.  When deciding between a Roth IRA vs 401k, you should take into consideration all the differences between the two.

The largest difference between a Roth IRA and a 401k are taxes.  A 401k is funded with pre-tax dollars while a Roth IRA is funded with after tax dollars.  This means that a person with a 401k could fund their retirement account without having to pay any taxes on the contributions.  However, when retirement comes and you look to withdraw funds from your retirement accounts, withdrawals from the 401k will be taxed while withdrawals from the Roth IRA will not.  Therefore, if you feel you will be in a higher tax bracket upon retirement, a IRA will be the better choice.  If you will be in a lower tax bracket upon retirement, the 401k will be the better choice.

Another large difference between a Roth IRA and a 401k are the contribution limits.  A 401k allows annual contributions of up to $16,500, or $22,000 for those over 50 years of age.  On the other hand, a Roth IRA only allows for annual contributions of $5,000, or $6,000 for someone over the age of 50.  Furthermore, many 401k accounts are employer sponsored and come with additional employer matches.  The employer match, which is normally a dollar for dollar contribution up to a certain percentage of the employee’s salary, is essentially limitless.

The third difference between a Roth IRA and a 401k are the income limits.  A 401k retirement account is available to anyone, regardless of their income.  On the other hand, a Roth IRA is not designed for the extremely wealthy.  A Roth IRA is not available to those individuals with an adjusted gross income of $110,000 or more.  Married couples with a combined adjusted gross income of $160,000 are also ineligible for Roth IRA contributions.

In conclusion, due to the fact that each account allows for tax free growth, a Roth IRA and 401k are both excellent retirement vehicles.  However, there are several differences between the two account which should be taken into consideration when deciding which account to open.

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