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401K Versus Roth IRA

May 16, 2012 | Comments: 0 | Views: 202

There cannot actually be a winner when you compare 401k versus Roth IRA, as they both have their set of advantages and drawbacks. Even when you consider the unique feature of self-directed 401k plan, it cannot be considered a retirement solution that can fit everybody. A better understanding of these two retirement plans can be gained when we compare their main features.

Comparison of Main Features based on Important Aspects

Contribution Limits: The contribution limit per year for 401k for 2011 is $16,500 and has been raised to $17,000 for 2012. For Roth IRA, individuals can contribute the amount of their taxable income or $5,000, whichever is less. Contributions to 401k can be made irrespective of the amount of income, whereas you can only contribute to this fund if your income does not exceed a certain amount as per your filing status.

Taxation: 401k contributions are tax-free, as they are deducted from the income before calculating the tax, whereas Roth IRA contributions are after tax. However, on maturity, you do not have to pay taxes on any withdrawals from your account, while 401k withdrawals are taxed.

Participation: In 401k plans, the employer can also contribute, and match the amount contributed by the employee, or a percentage thereof. In Roth IRA, the individual is the sole contributor.

Choice of Investments: In 401k, the individual does not have much choice, and investment options are limited to the plan chosen by the employer. However, in Roth IRA, the individual can, not only select the custodian, but also the various investment options that are on offer.

Withdrawals: You can withdraw from your 401k account only when you have reached 59 and half years. Any withdrawals before this date will attract a penalty. However, contributions made to Roth IRA can be withdrawn anytime. You can also keep your money in the 401k account up to the age of 70 and half years, after which it is mandatory to withdraw, whereas Roth IRA does not have mandatory withdrawals.

Advantages based on Requirements and Individual Needs

The above comparison of features brings out the advantages and drawbacks of each plan. For instance, you could gain a lot by opting for a 401k plan, where you are able to get contribution from your employer as well.

If you consider taxation, both plans offer a distinct advantage, and it will depend on your requirements. If you feel it is better to manage the tax burden during contribution, and enjoy tax-free withdrawals, then this option is ideal. However if you feel that taxes are going to come down in future then 401k is a good option.

Roth IRA has a distinct advantage, while considering the range of investment options. However, it can be a disadvantage if you do not have much knowledge about the economy and finances.

Advantages of 401k versus Roth IRA are highly debatable and individual requirements play a big part in deciding the right option. Although the self-directed 401k plan gives you more flexibility in choosing your investment options, you cannot totally rule out this option while considering other aspects.

The author has spent a lot of time learning about 401k versus Roth IRA and other related topics. Read more about self directed 401k plan at the author's website.

Source: EzineArticles
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