401K VS Roth IRA – Are you REALLY setting yourself up to retire?

It’s never explained to us in school, and we never really get much of a chance to learn about them after that. The labyrinth that is modern day Finance is generally so confusing that most of us just take what we are told as fact and run with it. Who has time to deal with that anyway? But when it comes to your retirement, it is always best to know what is really going on.

So what is a Roth IRA? And what is a 401k?

Why does my employer offer one and not the other?

Which one is best for me?

Well they are pretty similar. Both are savings accounts for retirement. Both take contributions, which are then invested, and slowly grow over time. Both plans have a max amount you can contribute every year, and both plans have a higher maximum contribution for those over 50 years old.

The minute details however, make all the difference.

A 401k is an account that is facilitated by an employer, who can also contribute to the account, usually matching your contribution up to a certain percent. This money is deducted from your paycheck before your taxes are deducted, which means it does not get taxed until you take the money out of the account (a feature that a lot of people tend to have a problem with, which I will discuss later). There are also limitations on the types of investments that can be made with your 401k account.

A Roth IRA conversely is established between a person and the institution. This makes a few changes to the structure of the account. Because your employer is not setting it up, you will be the only one contributing to it. But with this change, you are free to choose from a far greater variety of investments that your account will make. Also, because of the structure of this account, your money will be going in after being taxed, which means there will be no taxes when you pull it out.

To figure out which is best for you, you should speak to a retirement professional, but with my limited knowledge, I will lay out what I know as best as I can.

A 401k offers fantastic security, and the added bonus of having free contribution. Basically free money on which you can retire. Though a Roth IRA does not offer that additional contribution, having the freedom to choose your own investments, there is the potential to make that additional money.

The real issue is the taxation. When taking out your 401k, it is all taxed together, with the rest of your earnings from that year. So depending  on how much you withdraw and how much you make that year, you may end up spending way more on taxes than you had anticipated, since the sum withdrawn may push you into a larger tax bracket. But with a Roth IRA, you will not be liable for taxes when withdrawing, so you do not have to worry about this.

Really, you should talk to a retirement professional if you have questions about retirement. Keep in mind, I am not one of those, do not take anything that I have told you here as the advice of a professional, but rather as a reminder that your retirement is important, and you shouldn’t leave it up to your employer to make the right decisions for you when you are the one that has to live with those decisions.

Take your retirement seriously and make sure to educate yourself!

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