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Roth IRA VS 401K? Initially this may not mean much to you, but this is a key question when starting down the road to investing for your retirement. Let us run through how a Roth IRA and 401K plans are different and access the options.

The 401(k) is designed for employees who wish to save for retirement. Money is deducted from wages prior to taxation and invested in the company 401(k) retirement plan. The capital is then allocated usually in a self-directed manner by the employee, between a selection of investment choices made available by the employer. The list can sometimes be a little restrictive depending on which fund family or fund families the employer has subscribed the 401(k) plan into.

Companies may offer a matching contribution as part of their total compensation package to an employee, where they agree to invest a matching contribution up to a specific limit. The 401(k) permits withdrawals from the age of 59½ through until age 71. Such withdrawals are subject to taxes at the prevailing rate at that time.

An alternative to the 401(k) plan is the Roth IRA. The Roth IRA is available to all investors with an income below $100,000 and selectively for those a little above this level. Monies are invested in a Roth IRA from post-tax income, but are not subject to taxes under usual circumstances during withdrawal. There are also no taxes on the investments while held in the Roth IRA, with the exception of some investments like foreign stocks where taxes are deducted at source in the respective countries and not refunded. Yearly investment limits are $5000 below age 50 and $6000 above the same ago, except where income was below the limit and then the income is the maximum contribution for that tax year.

A Roth IRA withdrawal is permitted at any time without penalty if above the age of 59½ and with penalties if below this age. The benefits of a Roth IRA is the ability to get taxation paid and resolved early on in the life of the investment, as well as greater access to a wider range of investment choices.

In choosing between a Roth IRA VS 401K, you will need to consider your personal situation carefully to see which option suits your individual circumstances. In some cases, subject to having enough funds, investing in both a Roth IRA and 401(k) plan might be preferable.

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