Gold 401K

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Gold Setup 401k

Q: I am trying to decide if opening and contributing to a Roth IRA would be a better option to contribute beyond what my company matches my 401K.

A: Ideally, it is better the most of both your 401K and Roth IRA accounts, you can save more for retirement, the better. However, for many people this is not possible, therefore, the question then becomes which account should I invest first?

In general, it is preferable invest in your 401K plan first to the amount your employer match, then invest in a Roth IRA. If you have additional funds to invest after making the maximum contribution to your Roth IRA, you should max your 401K and invest in liability accounts. There are always exceptions, however, here are some points to consider when deciding the best invest their retirement funds:

Counterpart Contribution – many employers provide a contribution consideration in choosing to participate in the company 401K or other retirement plan sponsored by the employer. It's free money, and should be exploited, even if your 401K plan is not the best choice for investment because of poor, high costs, etc. There no matching contribution to a Roth IRA, then you should invest in your 401K contribution to the first game, before investing in a Roth IRA account.

Investment Options – Most 401K plans have a limited number of investments to choose from. Roth IRA can be opened anywhere: Companies Fund mutual funds, brokerage houses, banks, etc., which means your investment choices are unlimited. If your 401K plan has limited investment choices poor or to choose the Roth IRA may be the best option (after contributing enough to get input from the game in your 401K plan).

Taxes – even if their contributions 401K tax-deferred, which allows more money to go to work for you, money invested in a Roth IRA tax free. If you follow the rules, they will never pay tax on income a Roth IRA. If you expect to be in a higher tax bracket at retirement, which could result in substantial tax savings.

Because withdrawals a 401K account are taxed at ordinary income tax on income, the withdrawal could push a bunch more tax rate. If you a combination of 401K and Roth IRA accounts, you have greater flexibility in choosing which account to withdraw from this that could allow tax-planning opportunities to help reduce your taxes during your retirement years.

One more note regarding taxes: 401K, traditional IRA and other plans Retirement sponsored by employers are subject to rules required minimum distribution, Roth IRA are not. Again, the Roth IRA accounts, in collaboration with their 401K accounts can provide tax planning opportunities not available to people who only have 401K accounts.

Withdrawals – Your contributions to a Roth IRA are available penalty and tax free at any time. Your earnings in a Roth IRA can also be withdrawn at any time. There is a 10% penalty, but this penalty may be waived in certain circumstances (for buyers with disabilities, for the first times more than qualified education expenses). Withdrawals from a 401K plan is much more restricted, as employers may or may not allow withdrawals or loans early.

Automatic investments – contributions to your 401K account are automatic since they come directly from your check pay. This makes investing in your 401K easy and convenient, and began to contribute, usually no longer miss the money. Invest in a Roth IRA takes more effort. Although many Roth IRA custodians will allow you to set up an automatic investment plan from your savings account or verification, it takes more discipline to invest in a Roth IRA it there to invest in a 401K plan. If you think you have the discipline to invest in a Roth IRA, then invest in a 401K plan (even a poor 401K plan) is better not to invest at all.

Conclusion: Every case is different, and there no specific order for retirement investing that is perfect for everyone. However, investing in your 401K to action, then open a Roth IRA is a good strategy for most people as a combination of 401K and Roth IRA can offer you the best of both worlds. Both types of accounts have many benefits that can enable opportunities for flexibility and planning with regard to withdrawals and taxes, both before and after retirement.

Kristine A. McKinley, CFP, CPA, and founder of Beacon Financial Advisors, teaches individuals and families how to invest and plan for retirement, college, and other financial goals. Kristine offers financial and tax planning on an hourly, fee-only basis.

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