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401(k) vs. Roth IRA

Here’s a breakdown of the 401(k) and Roth IRA.

Jake Jones Mar 8, 2013

In 1997, the Roth IRA was introduced to retirement planners as part of the Taxpayer Relief Act. People have had more than a decade to familiarize themselves with the Roth IRA but many still have misconceptions of available retirement savings vehicles. Financial planners advise retirement planners to analyze the pros and cons of 401(k)s and Roth IRAs in conjunction with their personal discipline, income and tax goals before choosing your savings vehicle.

If you're still unsure of your retirement investment, here’s a breakdown of the 401(k) and Roth IRA.

401(k)

A 401(k) is offered through your employment which involves your personal contributions and employer-matched contributions. Employees can contribute up to 15 percent of their salary or $10,000, whichever is smaller.

The employers have the ability to provide matching contributions on employees. For example, your employer can contribute 33 to 50 cents for every $1 donation. This is a 33 to 50 percent instant return on investment, much more impressive than a typical return on investment.

The 401(k) contributions are tax-deferred payroll deductions which means you don’t pay taxes on the contributions until you take the money out once you reach 59 ½.

Roth IRA

According to Dorothy Rosen of BankRate.com®, the Roth IRA is “the best thing the IRS has done for the average taxpayer in a long time.” Rosen explains the differences between a 401(k) and Roth IRA. Unlike the 401(k), contributions to an IRA are not done through your employer. Most people who invest in an IRA go to large investment firms and open an account with them for their investment.

The most important difference between the Roth and 401(k) is that neither your contributions nor any withdrawals are taxable as long as the account has been opened for more than five years. Even if you pass away, your surviving family members will not be forced to pay taxes on your investment.

The maximum annual contribution for a Roth IRA is $5,000 for people under 50 and $6,000 for people over 50.

Which is Right for You?

Deciding which savings vehicle to utilize is a personal decision, but there is no legislation forbidding retirement planners from investing in both a 401(k) and Roth IRA. Tisa Silver-Canady, assistant director at the office of Financial Education and Wellness at the University of Maryland said, “in a perfect world you would do both. You would have a 401(k) from your job and something you were in control of with an IRA.”

It’s important that you consult with an objective financial planner before making important retirement saving decisions for your family.

Sources: Fox Business, BankRate.com

The information contained herein may not represent the views and opinions of Zions Bank or its affiliates and is intended for informational purposes.  It is presented for general informational purposes only and does not constitute tax, legal, investment or business advice.
 

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