Should You Open a Roth IRA? Or Should You Stick to a 401(k)?

When it comes to choosing between a Roth IRA vs 401(k) for retirement, the good news is that there’s really no wrong decision. But you should make your choice based on which account fits your financial needs. Are you investing for the long-term? Or is FIRE your goal? Here are a few things you need to know before you decide which route to take.

I need a refresher. What’s a 401(k)?

A 401(k) is a retirement savings plan you can open with your employer. You decide how much you’d like to contribute each pay period. And some employers will match the amount, up to a certain point. Your contributions are deducted from your gross pay. Read: Before taxes are taken out. The money you contribute goes to the investments you chose when you enrolled. And it’s only taxed if you decide to make a withdrawal after age 59 1/2. Otherwise, you may run into penalties for making an early withdrawal. 

Got it. And what’s a Roth IRA?

IRA stands for individual retirement account, which means your employer isn’t involved. Instead, you open your account with a brokerage firm. Like Charles Schwab, Fidelity, or Vanguard. And your contributions are made after taxes are deducted. The good news: You won’t have to worry about taxes when you make a withdrawal after age 59 1/2.  

What are the pros of a 401(k) vs. a Roth IRA?

The main benefits of a 401(k) are that pre-tax money goes into your account. And your retirement savings could grow a lot faster if your employer contributes to it.  Plus, if you’re new to investment accounts, a 401(k) plan is the more popular option. Because a Roth IRA comes with unlimited investment options, which means there’s more room for things to get complicated.  

Are there any limits I should know about before I make my decision?

Whether you choose a Roth IRA, 401(k), or invest a little in both (yes, that’s an option, too), there are a few restrictions you should know about.

For a Roth IRA:

• You can only contribute if you have earned income.

• If you’re under 50, you can contribute a max of $6,000 each year.

• If you’re 50 and older, you can contribute a max of $7,000 each year.

Your contributions can’t total more than your earned income. Example: If you earn $4,000 in one year, that would be your max contribution. Because $6,000 would be more than your earned income amount.

For a 401(k):

• If you’re under 50, you can contribute up to $20,500 per year.

• If you’re 50 and older, you can contribute up to $27,000 a year. 

• And, reminder, you can only access a 401(k) through your employer.

theSkimm

When it comes to saving up for retirement, you’ve got lots of options. And if you’ve narrowed your choices down to a 401(k) vs. a Roth IRA, your final decision should depend on your retirement goals, how much freedom you want, and when you’d prefer to pay taxes.