Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
An employer sponsored 401(k) might have employer contributions which would certainly make it a wonderful enhancement to your retirement. Your contributions to a 401(k) are usually before tax, so that reduces your current income tax. A Roth IRA, on the other hand is paid with contributions that are not currently tax deductible. Both plans accumulate money on a tax deferred basis. There isn’t any tax on current earnings. However, when you start to draw benefits, assuming you meet all the requirements, the 401(k) benefits will be taxed as ordinary income. The Roth IRA benefits will not be taxed at all.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
How is a Roth better than a 401k? Well it's not a matter of better, it's a matter of different. Both a Roth and 401k give you tax deferred savings, they just differ on when taxes are applied. A 401k allows contributions to go in pre-tax and grow tax deferred. When those funds are withdrawn they are income and subject to taxes in what ever bracket you're in. A Roth does the opposite, you pay taxes on your contribution and it grows tax deferred, then distributions from your Roth are done without any tax implication.
So the question of one over the other is do you think taxes will be higher or lower when you begin to withdraw funds?
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So the question of one over the other is do you think taxes will be higher or lower when you begin to withdraw funds?