Roth IRA vs. 401k
A look at the world of Roth IRA limits and more investment details about these retirement plans.
If you’re weighing out the pros and cons of the Roth IRA vs. 401k, this article will serve to give you some background information on each type of savings plan, highlighting the differences between Roth IRA accounts and 401k plans.
The concept of an Independent Retirement Account (IRA) is founded on the need for taxpayers to have a savings investment to fall back on after retirement. This will allow them save up during their productive years against the years in which they can no longer work as they once did. The traditional retirement plan that is well known to most people is the 401k. However, the one that seems to be gaining a lot of popularity right now is the Roth IRA. In this article, I will examine the Roth IRA vs. 401k. I will highlight the pros and cons of both savings mechanisms with a view to exposing the advantages of either package.
The 401k is a retirement savings account that allows your employer to withdraw an amount of money from your paycheck and deposit it on your behalf, and into your 401k account. This is done before taking out income taxes and the money becomes due for you to withdraw upon retirement. At that time, though, they become subject to income taxes. The maximum that an individual could contribute as of 2009 was $15,000 and a maximum of $46,000 between the individual and his employer.
The Roth IRA was created pursuant to the Tax Payer Relief Act 1997. It is also an IRA in the mold of the others, but with a different structure. Taxpayers who decide to contribute under the Roth IRA make contributions into the Roth IRA account from their income. This is subject to such a person meeting certain criteria. The due sum may be withdrawn at the due date without tax deductions. This tax deduction is the major difference between the Roth IRA and traditional IRAs.
Generally, there are three major differences to be seen when looking at the Roth IRA vs. 401k.
i. Employer contribution: Under the 401(k), your employer is allowed to make a matching contribution to yours. That is, if you decide to contribute 10% of your income, he can decide to add 5% to it. In other words, he adds 50% of the amount you have decided to contribute.
ii. Investment options: Under the 401(k), you really do not have much of a say as far as which provider to use, as this is done by your employer. This is different under the Roth IRA, as you can choose the provider of your choice.
iii. Taxes: This is the option most looked at by taxpayers. They want to know how both packages affect their taxes. The fact is that you have to consider whether your income taxes will have increased by the time you retire. If you will feel that this will be the case, you might as well choose the Roth IRA. This is because the Roth IRA is not subject to taxes at the time of withdrawal.
There is always a decision to make with regards to the choice of IRA and at the end it depends on a number of factors as enumerated above. In making a choice between the Roth IRA vs. 401k, your priorities will be a major factor.