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Which Retirement Savings Plan Should You Choose? Roth IRA vs. 401(k)

By    |   Monday, 27 April 2015 09:49 AM EDT

A Roth IRA account and 401(k) plan both offer secure and gainful strategies for retirement savings. The plan you choose depends on your individual needs or financial situation.

Basically, a Roth IRA is for those who prefer an individual type of investment plan, whereas 401(k) plans are done within a company or employer.

The Roth IRA is taxed while you make contributions. You take out the money tax-free when it's time for distributions, when you're ready to retire. Contributions made to a 401(k) plan aren't taxed during accumulation, but the money is taxed when you start taking funds out of the plan.

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Roth IRAs are individual retirement accounts named after Sen. William Roth, who sponsored legislation for the plans. You set up a Roth IRA account with a financial planner or brokerage firm. Usually, people have money deposited from their checking accounts on a regular basis to build the fund.

You can start taking money out of the Roth account once you're 59 according to IRS regulations, which include reaching age 59 and a half and having had the plan for at least five years, reports The Simple Dollar.

Since you fund the account with after-tax dollars over the years, your withdrawals are tax-free. You can also take out money penalty-free for certain reasons, which the IRS allows, such as paying for a child's education or putting a down payment on a house.

While you can choose your financial planner or brokerage firm for a Roth IRA, a 401(k) plan is done according to an employer's plan. There are many plans available for employers and employees to participate in.

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Depending on your options, you might contribute a certain amount to the plan while your employer provides matching funds. Some plans allow you to take out loans or withdraw money penalty-free for hardship cases.Employers have the advantage of deducting contributions on their federal tax returns.

Since 401(k) plans are done in conjunction with an employer, annual contribution limits are $18,000 for people age 49 and under with an additional $6,000 for those who reach age 50. Contributions limits for a Roth IRA are up to $5,500 for those 49 and under with an additional $1,000 contribution when reaching age 50 as of 2015, according to Fidelity Investments.

Reasons to consider Roth IRA vs. 401k plans might include your anticipated financial condition in the years ahead. If you think you'll be making more money before you retire, the Roth plan might make better sense for those in the higher tax brackets.

If you're closer to retirement and feel you'll be in the same tax bracket, a 401(k) plan might be a better choice. As always, speak to a financial adviser or professional when deciding on which plan is better for you.

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A Roth IRA account and 401(k) plan both offer secure and gainful strategies for retirement savings. The plan you choose depends on your individual needs or financial situation.
roth ira vs 401k, retirement savings, plan
Monday, 27 April 2015 09:49 AM
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