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Roth IRA vs 401k - everything you need to know

Roth IRA vs 401k - everything you need to know
Have you already thought about saving for retirement? If yes, you probably know that the two most popular options are a 401(k) and a Roth IRA. They are quite different in many ways and might not suit everyone’s needs equally. Depending on your income level, eligibility criteria, employer match, and contribution limits you can make a choice between the 2 of them or sometimes even decide to use both.

Difference between a 401(k) and a Roth IRA

Roth IRA, unlike a 401(k), is a private individual retirement plan that you can open for yourself in a local bank or any investment firm. If you are choosing Roth IRA, your employer will not send money to your account but rather you will have to save up a part of your income yourself. It is more flexible than 401(k), as you are working closely with a financial adviser and can control what kinds of investments are made. A 401(k), on the other hand, is sponsored by your employer, meaning that if you are employed full-time, you might be offered a retirement plan as a part of your benefits package. However, sometimes you can choose how much of your paycheck will be contributed towards your retirement plan. A 401(k) is usually less flexible than a Roth IRA because when you sign up for this plan your investments are usually managed by a huge investment bank like Fidelity or Vanguard, depending on your employer’s choice. Some 401(k) plans, however, give you little control over how your cash is invested or you can give the bank all the reigns. One of the key differences between the 2 retirement plans is the way your savings are taxed. 401(k) contributions are taken out of your paycheck before taxes so that you don’t have to pay any taxes on them. On the other hand, Roth IRA contributions are taxable. And, what is more important, you are responsible for those taxes and only you. However, the 401(k) plan can be taxable in case you withdraw money from it before you retire. You will be facing a certain penalty and will need to pay taxes on every cent you withdrew.

401(k) vs Roth IRA

It is impossible to give a universal decision to everyone on whether they should be using a 401(k) or Roth IRA. One plan will not necessarily be better for you than the other, based on your financial situation. A Roth IRA allows you to make your own decisions, however, giving more responsibilities. On the other hand, a 401(k) lets your employer make all the important decisions, giving you less control but also fewer responsibilities. Making a choice between the two retirement plans you should first take into account their eligibility criteria. Roth IRA won’t allow you to contribute unless you earn less than $137,000 as an individual tax filer (or more than $203,000 as a joint tax filer). You can choose a traditional IRA then. Keep in mind that  401(k) allows you to contribute $19,000 per year and Roth IRA only allows $6,000 per year. You can choose both or neither, it’s up to you.