In light of the many options you may have for investing for retirement, it can be a challenge to figure out which type of account is best for you. The fact is, where you choose to invest your retirement money is not as important as the decision to start saving and investing on a regular basis. When saving for retirement, anything really is better than nothing.
You should do well saving for retirement no matter how you allocate your savings provided you develop and maintain a plan for saving a sizable portion of your income. This does not mean that it is not important where you put your retirement savings, because it is.
It can be difficult to predict your tax situation when you retire, so there is no way to guarantee what’s better, a 401k or a Roth IRA for your unique investment strategy.
As a general rule, if you are in the early stages of your career, it is highly likely that you will move up the income ladder as your career progresses, and therefore move into a higher tax bracket when you retire. This means that by investing in a Roth IRA you can pay your lower tax rate now, and then withdraw your funds tax-free when you retire.
What’s Better, A 401k or Roth IRA? Advantages And Disadvantages
A Roth IRA is a retirement vehicle that allows you to hedge your bets against higher future taxes. These higher taxes can come about as the result of an increase in your salary as your career progresses, or may come about from changes to the political landscape. The fact is that taxes are inescapable – you will either pay now or pay later.
What’s better, a 401k or a Roth IRA? In an employer sponsored 401k plan, your contributions are deducted on your current year’s taxes, reducing your tax burden immediately. You will, however, pay capital gains taxes on withdrawals, which should occur in retirement.
If you think that you will be facing lower taxes when you retire, or feel that an immediate tax benefit would be better for your situation, a 401k may be the better option for your investment objectives.
If you are willing to contribute the maximum amount to your Roth IRA, with all other things being equal, the Roth IRA will allow you to shelter more money from taxes than the identical amount invested in another tax-advantaged account, giving a Roth IRA an advantage over a 401k or 401b plan.
While a 401k can only be provided by your employer, and may have a limited number of investment options, a Roth IRA can be opened at a number of financial institutions and online brokerages, such as ETrade, provided you meet the income criteria for investing in this type of account, and follow the contribution limits set by your age and adjusted gross income.
A Roth IRA also allows you to invest in a wider range of investment across many asset classes, giving you greater freedom to invest your funds as you see fit.
Find The Best Strategy For Your Retirement
While no two individuals are the same when it comes to retirement investing, there are some guidelines that can assist you in deciding which investing avenue is best for you. For the most part, it is best to diversify your retirement savings across different types of individual retirement accounts in order to give yourself a variety of funds that receive different tax treatment.
For individuals who are offered a 401k with an employer match, it is wise to contribute enough to receive the match (this is free money, and really a no-brainer), and then funnel the remainder of your funds ear-marked for retirement into a Roth IRA.
This allows you to benefit from the tax advantages both now and later, and also allows you to pull money from your 401k first, and hold off on distributions from your Roth IRA as there are no mandatory age limits set on withdrawals from this type of account.
There is no one-size-fits-all solution to investing for retirement, and the answer to the question, “what’s better, a 401k or a Roth IRA?” may be different for you depending on your unique circumstances. Always consult with an adviser before committing any capital to a retirement account.