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.

What are the differences between investing in a Roth IRA vs. 401(k)? The first significant difference between investing in a Roth IRA versus a 401(k) plan is how you go about making contributions.

The second significant difference between a Roth IRA and 401(k) is the tax treatment. Roth contributions are made after-tax, while regular 401(k) deferrals are done pre-tax. That means you pay income tax today when putting money into a Roth IRA, while you get a current-year tax deduction when making 401(k) contributions.

When should you choose one vs. the other (or a mix of both)?

Your situation is paramount when deciding on retirement saving strategies (like most aspects of long-term financial planning). However, it is wise to ensure you get the most out of these tax-advantaged accounts. Snatching the company 401(k) match is usually a good first move. Many millennial and Gen Z savers should investigate their plan vesting policies.

Contribute to the 401(k) Plan Match, Then Go for the Roth IRA

Roth IRAs are more flexible than 401(k) plans since you can withdraw your contributions at any time tax-free and penalty-free. With more investing options—often at a lower cost—you can keep more of what’s yours in an IRA versus a 401(k).

Use Online Resources to Help You Choose How to Save for Retirement So, a mix of 401(k) and Roth IRA contributions makes sense for many people. Workers in their high-earning years are likely to be better off making pre-tax contributions.

How Should a Super-Saver Make Retirement Contributions? Super-savers can contribute to both a Roth IRA and 401(k). In 2022, a worker under age 50 could hypothetically put $6,000 into a Roth IRA and $20,500 into a 401(k). The $6,000 IRA limit can be comprised of both Roth and Traditional IRA contributions.

Knowing Thyself & Retirement Saving Strategies Always be sure to review your financial situation as the years go by, or hire a financial advisor such as a Certified Financial Planner who can work with you to understand your unique circumstances.

Consider your current tax rate versus your tax rate in retirement when deciding on pre-tax or Roth contributions. If you are in a relatively high tax bracket today, pre-tax contributions might be the better play. Also, weigh the flexibility of a Roth IRA versus sometimes-stringent 401(k) plan rules.

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