401(k) or Roth IRA - which is best for me? I'm often asked this question, and the simple answer is: "Yes!" Both types of accounts are excellent savings vehicles, and provide excellent benefits to you when looking for ways to efficiently save and grow your retirement nest egg. An example I often use is to consider 401(k)s and Roth IRA's as flathead and Phillips head screwdrivers. Both are similar, operating like the other. Try using a Phillips with a flathead screw and you'll quickly realize that neither is better, but both are certainly best. Now, a comparison to help you along the way.
One of the first considerations when deciding how to best save is the employer match. If your employer is going to make a contribution to your account on your behalf, TAKE IT. This is free money, and the value of FREE MONEY can't be understated. There is also the benefit of all 401(k) contributions reducing your taxable income for the year, which in many cases leads to your receiving a nice check from Uncle Sam at the end of tax season. If you like getting a tax refund, increasing your 401(k) contributions is a great way to increase your refund. Another benefit to the 401(k) is the amount you're eligible to contribute: $17,500 in 2013, plus an additional $5,500 if you're over age 50. To maximize your ability save, a 401(k) provides excellent opportunities, and if your employer's willing to match even a portion of your contributions, it's worth doing.
One major benefit of a Roth IRA is the tax-free part of it. Let your investments grow, and when it comes time to enjoy retirement, your tax burden on any withdrawals will be zero. That includes capital gains, dividends, and anything you contributed over the years - entirely tax-free. Another strong reason to contribute to a Roth early in your career has to deal with the income limits that are tied to contributions. Simply put, if you make too much money, you can't add to a Roth IRA. This is certainly not a bad problem to have, but it also means that Roth contributions should be made early and often in your career as to lock in the maximum tax-free benefits for yourself. With a Roth IRA, the contribution limit is a bit less than with 401(k) plans. For 2013, you can save $5,500 in a Roth, along with an additional $1,000 if you've celebrated your 50th birthday. There is a way to contribute more to a Roth however - many companies are starting to include Roth 401(k) options within their plans. With these, you contribution limits are the same as a regular 401(k). It's worth checking to see if a Roth 401(k) is available to you.
The simple answer to the question of which way to save for retirement starts with knowing what options are available to you, and whether paying less in taxes now or in retirement is more important to you (personally, I have no idea where taxes will be in 25 years, but doubt they'll be lower).
If you'd like to speak further about which is best for you, feel free to ask.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).