Roth IRA vs. 401(k): Which Is The Better Option?

The Roth IRA and 401(k) are two of the most popular retirement accounts. Choosing which strategy is best for your circumstance can be a tough decision.

This article will compare the benefits of choosing a Roth IRA vs. 401(k) and help you decide where to save and invest for the long run.

What are the differences between investing in a Roth IRA vs. 401(k)?

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. New employees usually elect 401(k) plan contributions to complete benefit enrollments.

Snatch the 401(k) Match

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.

Early Withdrawal Rules 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Flexibility vs. A Roth 401(k) A Roth IRA differs from a Roth 401(k) in that contributions made to a Roth IRA can be withdrawn tax-free and penalty-free at any time.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.

Annual Contribution Limits

A Roth IRA also has a lower annual contribution limit than a Roth 401(k). According to the IRS, the maximum IRA contribution for 2021 and 2022 is $6,000 ($7,000 for those age 50 or older).

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