Roth IRA vs. 401k

Published: 06/01/24

Hello! Today’s topic is: Roth IRA vs. 401k

A Roth IRA and a 401k are both different types of retirement accounts, however there are some clear differences between the two of them and it is important to be informed about these differences in order to maximize your money.

Let’s start with the 401k. In a traditional 401k, all of your contributions are tax-deductible, meaning you don’t have to pay any taxes on the money you put into the 401k, at least not right away. Once you want to take out the money from the 401k, then you are taxed. Usually this is an employer sponsored plan, where the employee can choose which 401k investment plan is right for them. The contribution limit for a 401k is $23,000 annually, so most people won’t hit this limit, and if you do, you are doing a great job setting yourself up for the future.

A Roth IRA is a different type of retirement account. Instead of paying no taxes at the beginning, and paying them when you withdraw the money, it is flipped. You must pay taxes right away in order to put the money into the Roth IRA, but there is no additional tax when retrieving it later in life. The limit for a Roth IRA is $7,000 annually if you are less than 50 years old, and $8,000 if you are older than 50.

The basic strategy when it comes to which type of retirement account to put your money into, think about where you are in your career. If you are just starting out, you are likely not making as much money as you will a couple decades from now, so your current tax bracket will be much less. In this case, a Roth IRA is beneficial because you will be able to tax your money in this lower percentage. Inversely, if you are midway through your career or almost done and you don’t believe you are going to climb up many more tax brackets, a 401k would be a better option for you.

Regardless which one you choose, saving for retirement is never a bad option. Think about how happy your future self will be. You are effectively investing this money into your happiness years down the line. As always, the earlier you invest, the more compound interest will help you make more money.