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In pursue of better health and less pain, Coralee started collecting articles and information on how to have a quality life with better health. Carl, her husband and web designer, turned her finding into the web pages you are viewing.
In their “spare time” they are professional tax preparers. Coralee and her husband, Carl, are founders of the CPA Moms. |
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Roth IRA * Roth IRA Or 401K - Which Is Better
Roth IRA or 401K - Which is Better?
Kristine A McKinley
Q: I am trying to decide if opening and contributing to a Roth IRA would be a better option than contributing over and above what my company matches in my 401K.
A: Ideally, it's best to max out both your 401K and Roth IRA accounts; the more you can save for retirement the better. However, for many people this is not possible, so the question then becomes which account should I invest in first?
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The Pros And Cons Of Converting To A Roth IRA For Those In A High Tax Bracket (The Star-Ledger)
Q. I’m 64 years old. Does it make any sense for me to pay a large amount in taxes to consider a Roth IRA conversion this year? I do expect to remain in a high tax bracket even after my...
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Generally, it's best to invest in your 401K plan first, up to the amount your employer will match, then to invest in a Roth IRA. If you have additional funds to invest after making the maximum contribution to your Roth IRA, you should max out your 401K, and then invest in taxable accounts. There are always exceptions, however, so here are some points to consider when deciding the best order to invest your retirement funds:
Matching Contribution - many employers will provide a matching contribution when you elect to participate in the company 401K or other employer sponsored retirement plan. This is free money, and should be taken advantage of even if your 401K plan isn't the best due to poor investment choices, high expenses, etc. There is no matching contribution for a Roth IRA, so you should invest in your 401K up to the matching contribution first, before you invest in a Roth IRA.
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Roth IRA, 401(k): What's The Difference? (Fox News)
The 401(k) version of the Roth has a couple of key differences from its IRA cousin.
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Investment Choices - Most 401K plans have a limited number of investments to choose from. Roth IRAs can be opened just about anywhere: mutual fund companies, brokerage firms, banks, etc., which means your investment choices are unlimited. If your 401K plan has limited or poor investment selections to choose from, the Roth IRA may be the better choice (after you contribute enough to get the matching contribution in your 401K plan).
Taxes - although your 401K contributions are tax-deferred, which allows more of your money to go to work for you, money invested in a Roth IRA grows tax free. As long as you follow the rules, you may never pay taxes on the earnings in a Roth IRA. If you expect to be in a higher tax bracket when you retire, this could result in substantial tax savings.
Because withdrawals from a 401K account are taxed at your ordinary income tax rate, withdrawals could potentially push you into a higher tax bracket. If you have a combination of 401K and Roth IRA accounts, you have greater flexibility in choosing which account to withdraw from, which could allow for tax planning opportunities to help minimize your taxes during your retirement years.
One more note regarding taxes: 401K, traditional IRAs, and other employer sponsored retirement plans are subject to the Required Minimum Distribution rules; Roth IRAs are not. Again, having Roth IRAs in combination with your 401K accounts can provide tax planning opportunities not available to people who only have 401K accounts.
Withdrawals - your contributions to a Roth IRA are available to you penalty and tax-free at any time. Your earnings in a Roth IRA may also be withdrawn at any time. There is a 10% penalty, but this penalty may be waived under certain circumstances (disabled, first time homebuyer, qualified higher education expenses and more). Withdrawals from a 401K plan are much more restricted, as employers may or may not allow early withdrawals or loans.
Automatic investments - contributions to your 401K account are automatic since they come directly from your paycheck. This makes investing in your 401K easy and convenient, and after you've started contributing, most likely you'll no longer miss the money being invested. Investing in a Roth IRA takes more effort. Although many Roth IRA custodians will allow you to setup an automatic investment plan from your checking or savings account, it takes more discipline to invest in a Roth IRA than it does to invest in a 401K plan. If you think you don't have the discipline to invest in a Roth IRA account, then investing in a 401K plan (even a poor 401K plan) is better than not investing at all.
Conclusion: Everyone's situation is different, and there is no one specific order for retirement investing that is perfect for everyone. However, investing in your 401K up to the matching percentage, and then opening a Roth IRA is a good strategy for most people, as a combination of 401K and Roth IRAs could provide you with the best of both worlds. Both types of accounts have many benefits which can allow for flexibility and planning opportunities when it comes to withdrawals and taxes, both before and after you retire.
Kristine A. McKinley, CFP, CPA, and founder of Beacon Financial Advisors, teaches individuals and families how to invest and plan for retirement, college, and other financial goals. Kristine offers financial and tax planning on an hourly, fee-only basis.
To sign up for free financial planning tips, worksheets, checklists and more, visit http://www.beacon-advisor.com.
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Index of Articles about Roth IRA
What Other Authors say about Roth IRA
Roth 401k- a Parlay for the Privileged
by Lawrence Groves
January 1, 2006, a new opportunity for savings came to town. Known as the post tax ROTH 401k - this is the classier sister to the traditional 401k plan. On one side is the post tax Roth 401k, with a fuller...
Important IRA Changes for 2006
by Matthew Tuttle
2006 is a little more than half way over but we have already seen some major changes in the IRA rules. This article will summarize two of these changes and what they mean to you.Income Limit for Roth IRA...
Plan For Retirement With A Roth IRA
by Frank Vanderlugt
Great retirement benefits and bonuses used to come standard with just about any job, but these days even the most loyal of workers are seeing their retirement packages pulled out from under them. At least...
Converting IRA to Roth IRA- Make a decision and reap the benefits
by Frank Vanderlugt
Converting IRA to Roth IRA is a financial decision that requires a careful assessment of your financial state and tax implications of the move. If you hold an existing Individual Retirement Account or...
Roth 401(k) .. A Wolf in Sheep's Clothing
by Lawrence Groves
Starting on January 1, 2006, 401(k) plan sponsors may offer a Roth 401(k) option. Those employers who want to offer this new Roth 401(k) will need to revise their current 401(k) program Roth 401 (k) Overview:*...
Contribution to Roth IRA
by Frank Vanderlugt
The need to plan for post retirement life is being widely recognized these days all over the world. A number of plans and accounts are available from banks and financial institutions, both public and private...
What Roth Hath, Traditional Hath Not
by Ken Morris
What Roth Hath, Traditional Hath Not The Taxpayer Relief Act of 1997 introduced a new Individual Retirement Account (IRA) called the Roth IRA. The primary inducement to make contributions to the new Roth...
You're Roth IRA Withdrawal
by LeeAnna
The Roth IRA was born on January 1, 1998 as a result of the Taxpayer Relief Act of 1997. It's named after former Senator William V. Roth, Jr. The Roth IRA provides no deduction for contributions, but instead...
Tax Help: Use Roth IRA in Estate Planning
by Andy Andersohn
Tax Tip: Using the Roth IRA for Creative Estate Tax PlanningParents must give serious consideration to protecting their family through creative estate tax planning. While life insurance and trusts should...
Should I Convert to a Roth IRA?
by Ken Morris
Should I Convert to a Roth IRA? This is a perplexing question many investors are asking themselves in the wake of all the new tax laws. If the opportunity is available, should an individual take a distribution...
Roth IRA stands for a Roth Individual Retirement Account.
by Frank Vanderlugt
In other words, a Roth IRA is a nice little way of saving for the future when you finally put your feet up and stop working after putting a few good long decades of hard slog. That's the IRA bit of Roth...
SUPER-CHARGE YOUR DREAM OF RETIRING RICH WITH THE ROTH 401(K)!
by Dr. Scott Brown, Ph.D.
This retirement account is so new and unique that you may not have heard of it. For additional reasons, I describe in my home study course, corporate insiders may not want to offer it to corporate employees....
Understanding The Roth Ira
by John Kaighn
The ROTH IRA is a retirement product which allows the withdrawal of tax free income from a tax deferred account, and it is a fantastic savings vehicle for people of any age, but particularly for younger...
Which Of These Costly Roth IRA Contribution Mistakes Will You Make?
by John Angel
The Roth IRA is a smart investment choice for retirement.Why? Because not only does your money grow tax free while you're investing in one of these accounts... but... the flexibility of the Roth IRA allows...
So you've never heard of a Roth Ira
by Elizabeth Gough
Well I think this is one of the best retirement savings options allowed by the tax department. It is especially beneficial to middle income Americans, specifically those earning less than $95,000 per year.This...
In the articles shown above on this web site you will find information that has been collected from many independent sources. Each article or item may offers a different point of view, but not necessary that of the CPA Mom's. This information is for general information only.
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