A Roth IRA and a 401(k) are both tax-advantaged retirement savings accounts that allow your savings to grow tax-free. However, there are some key differences between the two:
401(k)
- Employer-sponsored retirement plan
- Contributions are made with pre-tax income, which reduces your taxable income for the year
- Investment options are limited to those chosen by your employer
- Contributions are capped at $20,500 in 2023, with an additional $6,500 catch-up contribution for those 50 or older
- Withdrawals are taxed as income
Roth IRA
- Individual retirement account
- Contributions are made with after-tax income, so they dont reduce your taxable income for the year
- Investment options are more flexible and can be chosen by the account holder
- Contributions are capped at $6,500 in 2023, with an additional $1,000 catch-up contribution for those 50 or older
- Withdrawals are tax-free
In general, a Roth IRA can be a better choice than a 401(k) retirement plan, as it offers more investment options and greater tax benefits. However, many employers offer a 401(k) match, which matches your contributions up to a specific percentage of your income, making it a valuable option to consider. In a perfect scenario, you would use both accounts to put aside funds that can then grow tax-deferred for years.
