401k vs Roth IRA

If you've given any thought at all to your retirement options, you've probably heard about 401(k) plans and Roth IRAs. However, the differences between the two aren't always apparent, and many people have trouble deciding where to put their retirement dollars. If you're not sure whether to invest in 401(k) plans or Roth IRAs, consider differences between the two to help you make your decision.

401(k) plans with matching employer contributions trump everything else.
The primary differences between 401(k) plans and Roth IRAs are how they are taxed. This is a secondary concern, however, if you've got a 401(k) plan that offers employer contributions. With a Roth IRA, the only money that goes into it is money you pay. In employer-sponsored 401(k) plans, your employer typically offers some sort of matching, anywhere from 33 percent to 2:1 matching. Check out your 401(k) rules; regardless of how much your employer matches, if your employer offers matching 401(k) plans, contribute up to the maximum that your employer matches. As an added bonus, you can typically contribute more annually to a 401(k) plan than a Roth IRA.

Reading the future: evaluating tax benefits of 401(k) plans vs. Roth IRAs.
Employer-matching 401(k) plans aside, the deciding factor between a 401(k) and a Roth IRA is how it is taxed. 401(k) plans are established from pre-tax funds; you don't pay taxes on the money you contribute, but you pay taxes when you withdraw the funds in your retirement. With a Roth IRA, you make post-tax contributions; you pay taxes on your income today before depositing it, but don't have to pay taxes when you make withdrawals from the Roth IRA.

It can be difficult to decide which tax situation benefits you, but you can consider a few factors that simplify the question. Basically, do you think you pay higher taxes now, or when you'll retire? Generally speaking, people just starting out in a profession, whose income is likely to go up later in life, are good candidates for Roth IRAs; your taxes now are lower than your taxes will be in the future. However, if you're at the peak of your career, or expect your income to drop drastically when you retire, deferring taxes in 401(k) plans is a smart decision.

If you're a control freak, 401(k) plans may not be for you.
The other big difference between 401(k) plans and Roth IRAs is how they are managed. 401(k) plans are administered by your employer; you have no say in how the funds are invested. Roth IRAs are managed by the individual; you can choose your plan administrator, and decide how you want to invest your retirement funds. If you prefer an executive level of control over your retirement funds, you might want to consider a Roth IRA. If you'd rather not worry about how the funds are invested, 401(k) plans are the way to go.