If you’re preparing for retirement, there is a myriad of investment options available, and it can become head-spinning to choose the right option. So, quite understandably, one of the most frequent questions I’m asked involves the differences of a Roth vs 401k–which are two of the most popular retirement investment options.
Thankfully, when you remove the jargon, understanding these accounts is quite simple:
What is a 401k?
A 401k is a retirement savings plan sponsored by an employer. You can elect to have a portion of each paycheck automatically invested in this account each pay period, and some employers will even auto-enroll you in their plan.
Some of the advantages:
The money you invest in your 410k account isn’t taxed until withdrawal, and most importantly, its growth while invested isn’t taxed – meaning your money has a better ability to compound. In addition, many employers offer an employer match – where a portion of your contributions are matched by them, which is a tremendous value.
What is a Roth IRA?
A Roth IRA is also a tax advantaged account, but this isn’t an employer-sponsored plan, and it can be opened by almost anyone independently. Like a 401k, it has limits set by the IRS, and you cannot withdraw this account until you reach retirement age (unless you want to face heavy tax penalties).
Some of the advantages:
A Roth IRA is a unique investment vehicle because it takes after-tax dollars, and then invests them tax-free, and you can withdraw your earnings without taxes.
When deciding between a Roth vs 401k, you should also keep in mind that a Roth IRA has no required minimum distributions (like a 401k and most other tax-advantaged investments), meaning you aren’t required to take money out when you reach age 69.5.
Roth vs 401k, which should you choose?
Like with most of investing, there isn’t (and shouldn’t be) a one-size-fits-all answer when settling the Roth vs 401k debacle. And thankfully, there doesn’t have to be one winner: many find it helpful to invest in both these accounts to fully reap their benefits, especially because both have contribution limits. With that being said, it depends on your tax situation (since the two have different tax advantages)—and the right financial advisor will work closely with your accountant who can weigh both options in light of your taxes.
Whether you’re debating a Roth vs 401k, or are already investing, LexION Capital can help you achieve a financially worry-free retirement. If you’d like to learn more, don’t hesitate to contact us today.
