Roth IRA vs. 401k

A lot of people do not understand the basics of the 401k. Here is the short version of the differences between a Roth IRA and a 401k.

Roth IRA  Individual Retirement Account (Single contributor under the age of 55)                                                           

Maximum $5,000 contribution per year. 

After-tax contributions (net pay)

Withdraw tax free at the age of 59 1/2.

Can not have gross earnings greater than $150,000 per year.

10% penalty for withdrawing money out early (before age 59 1/2)

    main exceptions: higher education cost

                             medical expenses

                             downpayment on first home. 

               

401k

Contribute before-tax contributions (gross pay)

Can contribute up to $16,500 per year.

Employer usually matches between 3-6% per year

Need to know: You can invest in a Roth IRA as well as a 401k.

Advantages

Roth IRA: Funds grow tax free.

                                            

401k: Employer contributes based on a percentage of your salary.

         Can contribute up to $16,500 before tax earnings per year. 

Disadvantages

Roth IRA: 10% penalty for early withdrawal 

                 Can only contribute $5,000 per year ($10,000 per married couple) 

                 

401k: When withdrawing, you are taxed at your current tax rate. So, the more money you make, the higher you are taxed. 

          

Retirement can be a little tricky if you do not know what you are looking at, but hopefully this answers some questions you may have had.