An associate at work asked me which is better; saving in a tax-deferred 401K or a Roth IRA where your disbursements are tax-free? His young nephew had asked him the question. While both have their positives, I will say that bulk of my savings is in 401Ks and some that are transferred from a 401K into a Rollover IRA in brokerage accounts. Most of that was a result of my not being aware of a Roth IRA till much later. But would I have changed anything? And recently why did I start a Roth IRA?
The main advantages of a 401K are:
1. You can contribute money directly from your paycheck and if you don’t see the money, it is easier to save it.
2. It is taken out as pre-tax dollars and reduces your tax obligations year end.
3. Companies usually offer a partial match up to 3-5% of your contribution. That is free money one should take.
4. 401K being pre-tax dollars compared to a Roth IRA being post-tax dollars, a larger amount of seed money will multiply and grow much faster than a smaller amount.
5. The contribution limits for a 401K are $18,000 if you are below 50 with additional $6,000 catch up contribution if you are 50 or older. The contribution limit for Roth IRA is $5,500 and for 50 and over $6,500. Additionally you can also contribute to a spousal IRA if your spouse is not earning.
6. Finally, when it comes time to withdraw the 401K money in retirement, most of us will have less income for tax purposes and our tax rates will be smaller than when we were earning money. This is an advantage for a 401K versus Roth IRA.
So why put any money into a Roth IRA?
1. So why did I start a Roth IRA? I plan to day trade futures after I retire. I believe I can take a small amount of capital - as little as $13,000 and generate a $20,000 profit on it. By setting up a Roth IRA, I plan to make this money tax-free.
2. There is no harm in having both 401K and Roth IRA accounts.
The clear winner seems to me 401K. Feel free to comment on this blog post if you agree or disagree but this is how I see it!
