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How to Choose Between a 401(k) and Roth IRA

How to Choose Between a 401(k) and Roth IRA
Photo by Precondo CA on Unsplash

In the U.S., around 63% of people don’t fully understand what a 401(k) is and 66% don’t fully understand what an IRA and Roth IRA is. In my last article, I detailed the differences between these two retirement investment accounts. But how do you know which one to choose?

Which do you choose?

Ideally, it would be beneficial to do both, but there are certain limitations. A 401(k) is heavily reliant on whether your employer offers it. Your investment options, contribution limit and other benefits that come with a 401(k), such as employer matching, also are dependent on what your employer’s plan is. Fortunately, the majority of employers do offer some form of 401(k) plan. A Roth IRA has other limitations such as an income limit. In 2020, an individual making an income of less than $124,000 can make a full contribution. Individuals who have an income of $139,000 and more are not allowed to contribute at all. If you’re in between, then you can contribute partially. For couples that file jointly, the limit is a little higher. This decision isn’t an easy one to make. If you’re still having trouble choosing, here is a list of the pros and cons of a 401(k) and Roth IRA.


401(k)

Pros

  • Employer match
  • Higher contribution limits
  • Maintained by employer

Cons

  • Fewer investment options
  • Required minimum distributions
  • Higher fees
  • Withdrawals are taxed

Roth IRA

Pros

  • Withdrawals are tax-free in retirement
  • More investment choices
  • No required minimum distributions during your lifetime

Cons

  • Lower contribution limits
  • Income limits can prevent you from contributing
  • No employer match
  • Maintained individually

Even if you’re just starting out in your first job, it’s never too early to think about your retirement plan. These two experts in the retirement consulting industry say millennials squandering their retirement savings. Check it out!

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