Officiallythick

IRA vs. 401(k)

Posted on 09 Jun 2011 by admin | Filled under: uncategorized

When we're planning for our future, we want to be sure we choose the best plans, the best programs and the best instruments for the job. But so many options can make it difficult to decide where to put your money.

Do you focus on your 401(k) or go after the popular Roth IRA? Here's a quick way to simplify your decision:

The withdrawals you'll one day make from your 401(k) are not tax-free, but because your contributions are withheld on a pre-tax basis, you'll pay less federal income taxes throughout the years that you contribute.

Distributions from a Roth IRA on the other hand, are generally considered to be tax-free, since you've already paid taxes on the money before depositing it into your IRA.

As to which investing option is best, you should ideally have both because each offers you a unique way of minimizing your taxable income while stashing away some cash for your retirement. But instead of trying to spread your savings out evenly between the two, focus first on your 401(k).

Why?

Most companies match up to a certain percentage so if you're not contributing the maximum matching amount, you're giving up free money. Granted, you'll have to stay with your employer for the required number of years to be vested in that free cash, but many employers offer a scaled vesting plan so each year brings you a little closer to another chunk of extra green.

Then, once you've maxed out your 401(k) and taken advantage of employer-matching, turn your attention to a Roth IRA. Unlike your 401(k), there's usually no penalties for early withdrawals from a Roth, making your savings much more liquid should you need them before retirement.