Retirement. Yeah, it feels confusing and complicated and you might have heard terms like “Roth IRA” and “401k” thrown around and then quickly filed them under “acronyms I’m never going to understand.” But, that’s why we’re going to explain what the heck the difference is between a Roth IRA vs 401k retirement account.
Plus, we’ll let you know which one we think you should be investing in now (spoiler alert: it’s not a 401k).
401K: The Good and the Bad
A 401k is an employer-sponsored retirement plan.
You can only invest in it if your employer offers it.
You direct a tiny portion of every paycheck into the plan (pre-taxes) and, often, your employer supplies a match.
Adding money to your 401k reduces your taxable income and you’ll be able to deduct your contributions when you file your income tax return for a nice tax break.
This all sounds like bonus money– which is great, right?
Yes and no.
First of all, your employer isn’t required to match your contributions, but most do.
You’ll save on taxes in the moment, but you’ll pay taxes after you reach retirement age and begin to make withdrawals from the plan.
You’ll be taxed based on your future tax rate.
So, if you’re planning on being a total badass in retirement (as you most definitely will be), then you’ll be taxed at a higher rate based on your higher income.
You’re also required to start making withdrawals (known as RMDs) from your 401k after you retire or after you turn 72– whichever comes later.
A 401k feels like extra money in the moment and, don’t get us wrong, if your employer is offering to match, that’s definitely a nice perk.
But, you’ll most likely pay higher taxes later on and also? You’re just saving your employer money.
Oh yeah, they benefit, too. They get a nice tax break and offering 401k plans makes them seem appealing to prospective employees.
We will say that a 401k has a much higher contribution limit than a Roth IRA, so if you’re looking to add tons of money to your account annually, this might be your plan.
Overall, a 401k plan puts the pressure to invest on you while your company saves money.
You also lose your freedom of investment choice, are subject to more rules, and will be paying fees associated with your account.
It obviously depends on how rad your company is, but the employer contributions might not outweigh the drawbacks of this type of retirement plan.
Roth IRA: Mo’ Money, No Problems
Unlike a 401k, a Roth IRA is set up directly between you and an investment firm, so say goodbye to your employer having any input on what you do with your hard earned money.
You get to set up and completely control the account.
Which means your investment choices aren’t limited to what your employer offers.
You’ll also use after-tax money to fund your Roth IRA.
That’s great news because you’ll have paid taxes up front, which means that no income taxes are taken out on withdrawals during retirement.
You know what that means?
More money for your amazeballs retirement, baby.
Those obnoxious RMDs we mentioned earlier?
Yeah, they’re not a thing with Roth IRA accounts.
So if you’re such a boss that you don’t even need the money, you can leave it in the account where it can continue to grow tax-free for whoever you decide to leave it to to happily enjoy later.
One drawback to a Roth IRA vs 401k is that a Roth IRA has income limits, so depending on your salary, you might not qualify to contribute to one.
They also have lower contribution limits, so you’ll be able to contribute less annually than you would with a 401(k).
Overall, though, Roth IRAs offer you more freedom and flexibility to do what you want with your retirement money.
You earned your money and there’s absolutely no reason you shouldn’t be in complete control of it.
The Choice is Yours (But We’ve Done a Lot of Research)
Listen, the biggest difference between a Roth IRA vs 401k retirement plan is when you pay your taxes.
You contribute to a 401k pre-tax and you contribute to a Roth IRA post-tax. There’s no way to escape taxes forever, so you get to decide when you pay them.
The bottom line is that you’re a strong, capable woman who deserves to be in control of your financial future.
We want to get you to that European vacay or whatever other well-earned R&R moment floats your boat (we’re not judging).
Your employer doesn’t decide where you go on vacation, so they shouldn’t get to decide how you save your money.
After all, investing in yourself also means fully trusting your ability to take control of your financial future like the boss babe you are.