What are the differences between investing in a Roth IRA vs 401k?
The first significant difference between investing in a Roth IRA versus a 401(k) plan is how you go about making contributions. With a Roth IRA, the onus is on you to open the account (usually at a popular online brokerage company’s website) and then fund it.With a 401(k), contributions come directly from your paycheck through your employer’s payroll system.
When doing your research, it’s also important to consider how employer matching contributions work within a 401(k) plan. Many firms have a matching policy; for example, 50% of the first 6% of contributions.
Here is a situation where a Roth IRA beats out the Roth 401(k): early withdrawals. Usually, pulling money out of your retirement comes with a penalty. That is not always the case with a Roth IRA since you can withdraw contributions at any time.
Roth IRAs Offer Withdrawal Flexibility vs. A Roth 401(k)
A Roth IRA differs from a Roth 401(k) in that contributions made to a Roth IRA can be withdrawn tax-free and penalty-free at any time. Inside a Roth 401(k), the plan participant faces a 10% early withdrawal penalty on withdrawals made before age 59½.
You will not be able to contribute to a Roth IRA if your income exceeds certain thresholds. A Roth 401(k) does not have an income limit. For Roth IRAs, retirement savers should review rules determined by the IRS.