It depends on your personal financial goals and tolerance of risk. It is best to consult a financial adviser who will take the time to discuss the advantages of both and how they relate to your personal situation. No two peoples situations are alike. Depending on how the 401k is set up you may possibly stand to receive greater gains than a basic Roth IRA but there may also be a greater chance of loss. There are also a variety of ways these can be set up, so it would depend on the details of the products being used.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
A 401(k) and a Roth IRA are two very different retirement plans. The 401(k) is a plan that is established and administered by your employer. The rules for the plan are detailed in a plan document available from your employer. These plans are individualized and may include participation by your employer. Money contributed to your plan by your employer is “free money.” Free money is the very best kind of money. As a rule of thumb you should consider participating in a 401(k) plan up to the limit that the employer will match.
Your contribution and your employer’s contribution flow into the plan before taxes. That means that the amount you contribute comes out of your paycheck before you get it. As a result there aren’t any taxes on that portion that goes into the plan. In order to put $100 into a plan it might take only $75 in reduced income because of the taxes. That is an example, not even a projection.
The Roth IRA is an individual plan. You establish a Roth IRA on your own. The money you contribute to the Roth IRA is not deducted from your paycheck and is not deductible from your income tax. The rules for the Roth IRA are in the Internal Revenue Code (IRC.)
The money in both the 401(k) and the Roth IRA will accumulate and earn free of current income tax. This is a tremendous advantage and should be strongly considered. There is a tax penalty for withdrawing the money prior to age 50.5 years. The Roth IRA might escape the penalty, but the 401(k) will not.
When money is withdrawn from the 401(k) the distribution will be taxed as ordinary income. This money has not been taxed previously. It will all be taxed upon distribution. In addition when you reach age 70.5 the government will require minimum distributions each year that force the money in the 401(k) to be taken as ordinary income.
Money can be withdrawn from a Roth IRA free of income tax so long as a couple of conditions are met. The Roth IRA is not subject to the minimum required distributions and may be passed to heirs free of income tax. There are rules involved but careful planning can generally avoid income tax altogether on distributed funds.
As you can see these plans are different and yet you might want to have both. The 401(k) contributions can be much greater than the Roth IRA. There are also limits on participating in a Roth IRA. Having both tax deferred and tax-free income can give you great flexibility in retirement.
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Your contribution and your employer’s contribution flow into the plan before taxes. That means that the amount you contribute comes out of your paycheck before you get it. As a result there aren’t any taxes on that portion that goes into the plan. In order to put $100 into a plan it might take only $75 in reduced income because of the taxes. That is an example, not even a projection.
The Roth IRA is an individual plan. You establish a Roth IRA on your own. The money you contribute to the Roth IRA is not deducted from your paycheck and is not deductible from your income tax. The rules for the Roth IRA are in the Internal Revenue Code (IRC.)
The money in both the 401(k) and the Roth IRA will accumulate and earn free of current income tax. This is a tremendous advantage and should be strongly considered. There is a tax penalty for withdrawing the money prior to age 50.5 years. The Roth IRA might escape the penalty, but the 401(k) will not.
When money is withdrawn from the 401(k) the distribution will be taxed as ordinary income. This money has not been taxed previously. It will all be taxed upon distribution. In addition when you reach age 70.5 the government will require minimum distributions each year that force the money in the 401(k) to be taken as ordinary income.
Money can be withdrawn from a Roth IRA free of income tax so long as a couple of conditions are met. The Roth IRA is not subject to the minimum required distributions and may be passed to heirs free of income tax. There are rules involved but careful planning can generally avoid income tax altogether on distributed funds.
As you can see these plans are different and yet you might want to have both. The 401(k) contributions can be much greater than the Roth IRA. There are also limits on participating in a Roth IRA. Having both tax deferred and tax-free income can give you great flexibility in retirement.