What's Better? A 401k or a Roth IRA
A 401k plan and a Roth IRA are slices of two different retirement pies: 401k plans are company sponsored retirement plans, while Roth IRAs are individual retirement plans. Which one is better, really depends on your personal situation. The key to your retirement success, however, is to pull up a chair to this retirement planning buffet and start immediately feasting on one, or both of these great plans.
The Appetizer: It’s important to understand that a traditional 401k plan lets you contribute as much as $23,000, in 2014; contributions and earnings are tax-deferred, until you start spending them in retirement. A Roth IRA, on the other hand, caps your 2014 contribution at $6,500. And while your 401k grows tax-deferred, your Roth IRA grows tax-free, because your contributions are made on an after-tax basis.
Double up your just Desserts: Many company 401k plans offer a matching contribution; basically free-money from the company added to the money you contribute. If this is the case, contribute an amount to the company plan which makes sure to claim all the matching contributions available. Never pass up free money! Then, contribute the maximum amount allowable (up to $6,500 in 2014) to a Roth IRA. Enjoying both options not only takes advantage of free money, but also hedges your bets on future tax rates by allowing some of your retirement savings to be tax-deferred, while the other portion to be completely tax-free.
Going Back for Seconds: If you still have the stomach to save more, consider heading back to your 401k plan and stuffing as much into the plan as your money belt can tolerate. How much is enough? That’s a separate question you need to answer, but if you desire a retirement filled with relaxation instead of work schedules, you need to be saving 10-15% of you pay. Don’t blame me if that number gives you indigestion. Feel free to pass up these tasty tax-advantaged treats today. Just understand that you may go hungry in retirement, it you don’t visit the retirement plan buffet table today.