401k Vs Roth IRA – A Guide

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Choosing an investment plan is something people don’t joke with. Depending on what plan you choose, you could end up with serious tax penalties on that account. On the other hand, if everything is properly set up, you will get the most out of your retirement account.

In this guide, we’ll be talking about two popular types of retirement plans; 401k and Roth IRA. We’ll also be comparing them in order to help you decide which one you should go for. So, with that being said, let’s begin.

What Is 401k Anyway?

Before we move on with the comparison, let’s talk a bit about this. 401k is a retirement account option. This plan is a bit special because it is tax advantaged. Many employers in the U.S. offer their employees this kind of plan.

Employees fund their 401k accounts by using a system called automatic payroll withholding. This subtracts a certain amount from their paycheck every month. In a few cases, their employers match most of these contributions.

You need to keep in mind that there are two different types of 401k accounts; traditional 401k and Roth 401k. Investment earnings in normal 401k accounts aren’t taxed until the owner withdraws the funds.

On the other hand, Roth 401k accounts are free from taxation when the employee attempts to withdraw money. This retirement plan was named after the former U.S. senator William Roth. Visit https://www.forbes.com/advisor/retirement/what-is-roth-401k/to learn more.

Over the years, many employees have started choosing this plan. Traditional pensions aren’t as popular as they used to be. This is because many employers have found ways to shift the risks and responsibilities that come with retirement savings to their employees.

Benefits Of A 401k Account

There are different benefits you can get by opening a 401k account. Here are some of them:

Employer Match

This is one of the main reasons why so many people love this option. If an employer is offering a 401k plan, this means that he/she will match your contributions. If you have such an opportunity, go for it.

High Contribution Limit

Speaking of contributions, you should know that the highest amount you can invest per year into your 401k account is about $19,000. Individuals over the age of 50 can invest as much as $25,000. That’s not all. This investment limit does not include your employer’s match.

Income Level Isn’t Limited

Unlike some other plans, 401k accounts don’t have a maximum income level. This means you can open one regardless of how much you earn.

Downsides Of 401k Accounts

This retirement plan is pretty good when you think about it. However, there are some disadvantages you need to keep in mind. Here are some of them:

RMDs

RMD stands for required minimum distributions. You have a chance to make good money with this plan. However, once you are about 70 or 71 years old, it becomes mandatory for you to make withdrawals of a certain number per year. If you don’t do this, you will end up paying penalties. Click here to learn more.

Sounds bad, right? That’s not all. You will also be penalized if you withdraw any funds from that account before you are 60 years.

Long Waiting Time

If you just recently got hired by a company, you can’t get a 401k plan. You will most likely have to wait a while before this option is available to you.

Self funding money illustration

Roth IRA – What Is It?

IRA stands for individual retirement account. This kind of account allows the owner to carry out withdrawals without incurring any taxes. Roth IRA accounts are a bit different from regular IRA accounts. Normal IRA accounts require the owner to pay income taxes whenever he/she makes a withdrawal.

On the other hand, Roth IRA accounts are a bit different. The owner of the account is taxed on all funds that come into the account. This means you don’t have to pay any taxes whenever you withdraw funds from that account.

No one can predict how taxes may rise in future. That’s why this plan is used by many people. It may help keep you from paying higher taxes on that account.

You need to keep in mind that not everyone is eligible for Roth IRAs. People who earn salaries of a certain amount will not be eligible for this plan. The limit varies each year. As of 2021, the limit for couples is about $208,000. For individuals, the limit is about $140,000.

There is also a limit to the amount you can contribute to such an account. Currently, the highest amount you can contribute to that account per year is about $6,000. However, if you are over the age of 50, you can contribute up to $7,000.

IRAs are a great option for employees of small businesses, or self-employed people. Majority of investment companies, banks, and brokerage firms offer Roth IRAs.

Benefits of Roth IRAs

Similar to 401k, Roth IRA plans offer various benefits. Here are some of them:

No RMDs

This means you can leave your money as long as you would like (provided you have had the account for a minimum of 5 years). You don’t have to withdraw funds from the accounts yearly once you turn 70. However, you will still pay penalty taxes if you take money from that account before turning 60.

Not Tied To Your Employer

Unlike normal employee retirement plans, Roth IRAs can be opened any time you wish. However, there is a minimum amount that you need to deposit. This amount varies depending on the service you opened the account with.

Various Investment Options

When working with a Roth IRA account, no one decides which investments you can choose. This gives you a lot more freedom than you would have with a 401k account. However, you must be very careful when choosing such investments. Try to get expert advice.

Downside Of Roth IRAs

The major downside to this plan is the contribution limit. There is a maximum amount you can put into that account yearly. Currently, the limit is about $6,000. However, if you are over 50, the limit is $7,000.

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Which Plan Is Better?

This isn’t something another person can decide for you. You need to carefully consider your options. Each plan has its advantages and disadvantages. Let’s take 401k for instance. Not everyone is completely happy with this plan and its penalties. If you are one of these people, you might want to consider turning the funds there into gold. Visit https://www.otisgold.com/401k-to-gold-ira-rollover/ to learn more.

Conclusion

Retirement savings are very important to workers and business owners. That’s why it’s important for you to choose the right plan. If you do this correctly, you will ensure that your savings will remain intact and even bring you some profit.