Retirement is one of the most important goals in anyone’s life. It’s the time when all your hard work has paid off and you can now relax and do everything you’ve ever wanted. Preparing for retirement can be difficult and sometimes stressful, but there are many different paths that all lead to the end goal of saving for retirement. Today, there are many accounts from traditional 401k’s where your company may match your contributions up to a certain dollar amount, to traditional and Roth IRA’s. A common question is which better and provides greater returns. Comparing the three common retirement saving vessels, we’ll look at each of their benefits.
The 401(k)
Starting with a traditional 401k, these are benefits that most companies offer as they begin to stray away from pensions. One benefit to having a 401k is that it is pre-taxed money and taxes are only paid once the money is withdrawn. Another benefit for some people are the limited options. This sounds like a negative but the set options help those who aren’t pros at picking investments get started. For example, stock asset options may include funds for aggressive growth, moderate growth, or value. For people who are very risk adverse, usually there’s some sort of money market account or bond fund for those who’s number one priority is to preserve capital. Lastly, be sure to take advantage of a company match if it’s offered, as it is free money.
The Roth IRA
Moving into a Roth IRA, this individual investment account requires you to pay taxes on your money pre-deposit, but you don’t have to pay taxes when you go to withdraw money. This is ideal for the person who may not want to pay taxes when they enter retirement and can rest easy knowing the money growing inside the account will not be taxed later. Another benefit of a Roth IRA include the option to use a one-time withdraw if you’re purchasing a home, as well as being able to withdraw any contributions penalty and tax free. If you are looking to save money for generations to come, Roth IRA’s are great because there are no required withdraws, and the money can continue to grow for years and years without paying taxes at a future date.
The Traditional IRA
Lastly, there is the traditional IRA, which also has unique benefits. For starters, funds in a traditional IRA are taxed when funds are withdrawn from the account. You have the ability to invest funds similar to a 401k, which includes stocks, bonds, and money markets. Unlike the Roth IRA, a traditional IRA does not allow you to withdraw contributions. If you must withdraw funds, they are subject to a 10% penalty and taxed at the appropriate income level. Traditional IRA’s also offer the same one-time withdraw for first time homebuyers. At the age of 70.5, a person must take at least the required minimum distribution. A traditional IRA is great for a person who needs to invest funds and let them grow until they retire.
Which Vehicle Makes Sense for You?
Comparing all of the accounts, it shows that each investment direction is different and may not fit everyone. A traditional 401k is a great way to save pre-taxed money, and it’s even better if your employer matches a percentage. Again, if your employer matches, take advantage of the free money. A Roth IRA is an excellent investment option if you’re looking to save money for generations to come, as there are no required distributions past the age of 70.5. Finally, a traditional IRA is fantastic if you are looking to put money away and watch it grow. As always, it’s a good idea to consult a professional before you invest to see which avenue will benefit you the most if you are unsure.
Which retirement option do you like most? Do you utilize more than one? Why or why not?
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