When considering a Roth IRA VS 401K, the options are different and quite specific to your employment and tax situation. In this article, we layout details about the Roth IRA and 401(k) plans, so that you can consider the choices carefully.

The 401(k) retirement savings plan was created for workers who are currently employed and wish to contribute to a tax-efficient retirement savings plan. The employer operates the 401(k) plan and makes available a range of mutual funds to invest in. Contributions are taken directly from wages prior to taxes being deducted and invested in the plan, using the agreed proportional allocation to each fund. Whilst most plans are self-managed, some offer only a fixed asset allocation.

The 401(k) plan is useful for making savings on taxes but during the withdrawal phase after age 59½, you are liable to tax on withdrawals. Some companies are generous and offer to match part of your contribution to the company 401(k) plan up to certain limits and this is well worth considering.

The Roth IRA is used to invest for retirement from post-tax dollars. There are investment limits of $5,000 when below age 50 and $6,000 when age 50 or over, with the exception that for people with incomes below the limit, the total income is the maximum that can be contributed that year to a Roth IRA.

A Roth IRA withdrawal is not usually subject to taxation, so the tax burden is handled years before you need to withdraw the money during retirement. The age limit is the same at age 59½ for initial withdrawals in order to avoid taxation on early withdrawals before the age limit.

Which is best, Roth IRA VS 401K will depend on a number of factors in your personal circumstances. Sometimes a fee-only tax adviser is a useful step to take to consider the options closely, but if your company offers a match then you should certainly strongly consider using the 401(k) plan to take advantage of the full matching contribution.

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  5. Invest easily, avoid the tax man

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