It is really difficult to declare a winner if you compare Roth Individual Retirement Account (IRA) to the 401(k) plan, since both of these investment vehicles have their very own set of pros and cons. Even if you take into consideration the exclusive feature of a self-directed or independent 401(k) plan, you still cannot consider it as a retirement solution which can suit everybody. You can acquire a much better idea of both these retirement savings plans if you go and compare their major features.
Comparing the Main Features of Roth IRA and 401(k) Based on Essential Aspects
Taxation – The contributions to a 401(k) plan are free of tax, since they are already deducted automatically from the earnings prior to computing the tax. Contributions to Roth IRA are, on the other hand, after tax. But then again, upon maturity, there will be no need for you to pay any tax on withdrawals made from your Roth IRA account, whereas withdrawals from 401(k) are taxed.
Contribution Limit – The highest amount that you can contribute to your 401(k) per annum, to date, is $17,000. When it comes to the Roth IRA, you can contribute the sum of your taxable revenue or $5,000, or whichever is actually less. 401(k) contributions can actually be made regardless of the income amount, while you can contribute to such fund only if your earnings do not go beyond a specific amount as indicted by your tax filing status.
Investment Options – In the 401(k), you do not actually have that many choices, and your investment options are restricted to the plan selected by your employer. In the Roth IRA, however, you can select not just the custodian, but the different investment alternatives which are offered as well.
Participation – In a 401(k) plan, your employer may also contribute as well as match a certain amount that you contributed or a fraction thereof. On the other hand, in the Roth Individual Retirement Account, you are the one and only contributor.
Withdrawals – You will be able to withdraw money from a 401(k) savings account, only if you have already reached the age of 59 ½ years old. Any withdrawal made prior to such stipulated date will draw a penalty. Conversely, contributions which are made to a Roth Individual Retirement Account can be taken out or withdrawn at any time. Aside from that, you can only keep your funds in a 401(k) savings account up to 70 ½ years of age, after which you have to withdraw your money, as this is the rule. There are no mandatory withdrawals in Roth IRA.
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