401k vs. Roth IRA - An Epic Retirement Battle

Saving for your retirement is an extremely important way to secure your own financial future. There is going to be a huge issue with social security in the coming years and you absolutely cannot count on it to carry you through retirement. In my opinion this is exactly what you should do.

A 401k is usually an IRA that is provided through an employer or business. The contributions that you make are pre-tax contributions. It takes the contribution out of your pre-tax earnings, so that it does not greatly effect your take home pay. These are typically company matched up to 5% of your earnings. With a 401k you must pay taxes on your earnings when you withdraw the money upon retirement.

A Roth IRA is one that you can acquire on your own through various brokerages like Scottrade, Zecco, or TradeKing. In a Roth IRA your contributions are post-tax. Meaning, you've already paid taxes on the money by paying income taxes. You make contributions of your own earnings thus allowing it to grow and then be withdrawn absolutely tax free. Currently, the US Government allows individuals to contribute up to $4,000 to a Roth IRA every year. This maximum should be going up within the next few years.


So which option is better for you? There are a couple of factors on which that depends.

Obviously, the best possible option is to max out both retirement plans every year. But if you can't do that, what should you do? Well here is my answer:

If you can only afford to do one and your company offers a match contribute as much as possible to your 401k up to the match point. If you are doing this and have extra money left over, I would then put your after-tax dollars into your Roth IRA. By doing this you are maximizing the amount of "free" money you a receiving from your employer match, and then also taking advantage of the Roth IRA's tax-free growth. If you don't have an employer plan then get started with a Roth IRA now! It's easier than you think and the sooner you start the more margaritas you'll be able to have while you're sitting on your beach front property in Hawaii.

Have more questions about Roth IRAs or 401ks? Comment or E-mail!