Roth IRA vs. Roth 401(k): Which Is Right for You?

When it comes to your retirement savings strategy, deciding what works for you might pose more questions than answers. This particularly rings true for people who happen to work for a large employer, as the employee may have the ability to contribute to a Roth 401(k). If your employment doesn’t offer a 401(k) plan or you are self-employed, it’s likely you would have to select a Roth IRA (individual retirement account) as a means for retirement savings.

So if you’ve found yourself at a fork in the road when it comes to your retirement savings (regardless of your employment situation), keep reading to learn the basics, benefits and considerations about Roth IRAs and Roth 401(k) plans.

Roth Accounts and Taxes

Roth accounts tend to be fairly different from traditional retirement accounts in the tax department. With traditional accounts, the contributions to the account is pretax. These accounts lower your tax bill and reduce your taxable income. However, you will pay income taxes on the funds you pull from the IRA or 401(k) with a traditional retirement account.

With Roth accounts, the contributions made have already been taxed, and it’s likely that you won’t have to pay taxes in the event you make a withdraw from your retirement. The bottom line: If you want to and can afford to pay taxes now, a Roth account would be your best bet. However, this decision also depends on how much income you make, save and spend in the present.

Savers Vs. Spenders

Do you make saving a priority, or are you living paycheck to paycheck? Answering this question honestly will make it much easier to select an account that will work best for you. A traditional 401(k) or IRA contribution will leave additional money in your wallet because they will lower your taxable income. However, these accounts will only work for you if you invest in them. For example, if you spend your tax refund, it will be of no assistance when you retire.

When it comes to investing the same amount into a Roth account, you will have less money left over because the taxes will be paid up front on your contributions. So if you’re an individual spending more than you save, a Roth account might be a perfect fit for you. In addition to taking out money out of your retirement without paying taxes, it’s possible that you could save more for yourself for the future.

So when considering Roth and traditional retirement accounts, a Roth account might work better for you in the long term. A Roth account is much like “swallowing the frog” in certain aspects — doing the tough stuff first — but the payoff can lead to a relaxed post-workforce lifestyle.