It is usually around the period of time between December and April that a discussion of Roth IRA’s comes up. This is because Roth IRA’s are a form of retirement savings in addition to 401(k) plans, and an individual can convert their IRA to a Roth IRA by paying the taxes on the tax deferred income to that point. That said, the Roth IRA vs 401k decision is not simple one. What is the difference between Roth IRA’s and 401(k) plans?
The first difference is that an individual contributes to a Roth IRA with after tax dollars, while 401(k) retirement plans are contributed to with before tax dollars. The advantage of contributing to a Roth IRA is that you will not have to pay taxes on the interest you earn from the investment. When 401(k) retirement plans first came out the argument was that it would not matter that you had to pay taxes on the interest earned. The statement was that you would be in a smaller tax bracket so it was okay that the interest was deferred until your retirement. The problem with this argument is that even though you may be in a smaller tax bracket, you are also on a fixed income. You do not want to pay taxes on the inflated income when you can not afford to pay it.
A second difference is that 401(k) retirement plans are generally offered by an employer as a benefit. By contributing to their 401(k) plan, the employee usually benefits from a matching from the employer. This becomes a form of a bonus to the employee. You should take full advantage of this benefit, and contribute to your 401(k) plan up to the maximum allowed by your employer’s match. Any other money you wish to contribute to your retirement could be placed in a Roth IRA.
It is important to save for your own retirement. There are several different methods for you to do this. It is advisable for you to take full advantage of all of the financial avenues available for you including the investment in both 401(k) and Roth IRA’s.