Roth IRA vs. 401(k): Which Should You Choose?

The Roth IRA and 401(k) are two of the most popular retirement accounts. Choosing which strategy is best for your circumstance can be a tough decision. This article will compare the benefits of choosing a Roth IRA vs. 401(k) and help you decide where to save and invest for the long run.

The first significant difference between investing in a Roth IRA versus a 401(k) plan is how you go about making contributions. With a Roth IRA, the onus is on you to open the account (usually at a popular online brokerage company’s website) and then fund it.

With a 401(k), contributions come directly from your paycheck through your employer’s payroll system. New employees usually elect 401(k) plan contributions to complete benefit enrollments. Investment choices are fewer in a 401(k) plan, but there will generally be a set of both stock and bond funds from which to choose.

Snatch the 401(k) Match That means, if you earn $100,000 and contribute $6,000 per year into your 401(k), your employer will pop in another $3,000 at no cost to you. That is an instant 50% return on your money in that scenario! It’s a great deal. Employer contributions are made pre-tax, regardless of whether you elect regular pre-tax contributions or Roth. Of course, there is no employer match with a Roth IRA.

Early Withdrawal Rules Usually, pulling money out of your retirement comes with a penalty. That is not always the case with a Roth IRA since you can withdraw contributions at any time. The IRS also allows you to take out earnings from a Roth IRA penalty-free in some situations.

Beyond traditional 401(k)s, how do Roth IRAs differ from Roth 401(k)s? Another trend that has emerged in the 401(k) space is the offering of a “Roth” 401(k). A Roth 401(k) works like a Roth IRA in some ways and like a 401(k) in other ways. We know that “Roth” means contributions are made after-tax.

A Roth 401(k) is simply another employer-sponsored retirement account, but money in that account has already been taxed and will grow tax-free through retirement.

Roth IRAs Offer Withdrawal Flexibility vs. A Roth 401(k) A Roth IRA differs from a Roth 401(k) in that contributions made to a Roth IRA can be withdrawn tax-free and penalty-free at any time. Inside a Roth 401(k), the plan participant faces a 10% early withdrawal penalty on withdrawals made before age 59½.

Beware of Roth IRA Income Limits You will not be able to contribute to a Roth IRA if your income exceeds certain thresholds. A Roth 401(k) does not have an income limit. For Roth IRAs, retirement savers should review rules determined by the IRS.

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