As my college years are coming to an end, I am starting to think about money and how I plan to live fiscally responsible. I will admit saving has never been a strong suit of mine, but I have recently started to improve. The importance of starting to save for retirement early has been drilled into my head by my parents, teachers, and many others. I have begun reading many articles on the topic and will be passing along my favorites to you.
The article today talks about the differences between 401(K)s and RothIRAs, with the information below summarizing the main points:
401 (K)
- Free Money: Can deposit up to $18,000 tax-free per year
- If over age 50 you have the option of adding another $6,000 per year
- Most have some type of matching program
- Employers are required to vet investment options and be transparent about fees
- Money in a 401(K) is off limits to creditors in the event of a bankruptcy
401 (K) Drawbacks
- Limited choices
- Plans are controlled by employer, restricted to investing in the funds your company chooses to offer
RothIRA
- Able to withdraw money tax-free in retirement (no tax deduction for deposits)
- Can deposit $5,500 a year if earnings are less than income limits
- If over 50 you have the option of depositing $6,500 a year
- More freedom to choose where the money goes
- Fairly portable – can always move the money around and transfer from one IRA to another
RothIRA Drawbacks:
- Income limits – if your income is too high you cannot deduct contributions
- Ability to deduct begins to phase out if you earn more than $61,000 (single filer) or $98,000 (married filing jointly)
- Income eligibility limits starting at $116,000 (single filer) and $183,000 (married filing jointly)
- Doesn’t offer the same level of creditor protection as a 401(K) – Inherited IRAs are accessible to creditors
- You are responsible for vetting the investment options – may end up with a more expensive plan
Click the link below discusses more in depth the differences between 401(K)s and RothIRAs and which one the experts in the article feel is the better choice:
http://www.dailyfinance.com/2015/07/27/retirement-savings-showdown-401k-vs-ira/
Written by: Caitlin Distelrath
