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

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. The contribution often comes from your checking or savings account, and it must be done with cash.

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.

The second significant difference between a Roth IRA and 401(k) is the tax treatment. Roth contributions are made after-tax, while regular 401(k) deferrals are done pre-tax.

That means you pay income tax today when putting money into a Roth IRA, while you get a current-year tax deduction when making 401(k) contributions.

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.

That means, if you earn $100,000 and contribute $6,000 per year into your 401(k), your employer will pop in another $3,000 at no cost to you.

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