As many of you know, I am a huge fan of the Roth IRA. One of the questions I get asked all the time is, would I even recommend the Roth IRA over contributing to your 401k or other employer sponsored retirement plan. While I can’t give a blanket answer here, I will give you a few points to consider, to help you make your own decision.
Are you getting a match?
Probably the biggest factor. If your employer is matching your contributions to your retirement plan, you will most likely want to at least contribute enough to take full advantage of the match. This is basically free money. It would be a mistake to leave it on the table.
Does your employer offer a Roth option.
A few years ago companies began rolling out a Roth 401k option in addition to the traditional 401k. I am not going to get into the advantages and disadvantages of the Roth vs Traditional in this post, but for purposes of this, lets assume that you have already determined that the Roth makes sense for you and that you could invest in either a Roth IRA or a Roth 401k.
• Higher contribution limits. For 2015, $18,000 if your under 50, and $23,000 if your 50 or older.
• Convenient. Contributions are payroll deducted
• No income restrictions. Anyone can qualify for a Roth 401k
• Limited investment options. Even the best 401k plans may only have access to a few dozen investment options
• Money may be locked up in the plan until you retire, separate from service or turn 59 1/2
• Even if you like the plan today, it can change at anytime.
• Lower contribution limits. For 2015, $5,500 if your under 50, and $6,500 if your 50 or older.
• Income restrictions. If you are single and make over $116,000 or if your married and your household income is over $193,000 you may be limited on how much you can contribute to a Roth IRA.
• No payroll deducted, although most providers should be able to set up a monthly auto debit from a bank checking or savings account.
• Virtually unlimited investment options.
• Account portability. If you don’t like your IRA custodian, its easy to change to another at anytime, with just some simple paperwork.
If your employer matches your 401k contributions you will probably want to make sure you’re contributing enough to get the maximum match you can.
After maxing out your match, if your income is under the limit, my recommendation would be to contribute to the Roth IRA. The greater flexibility and portability is too great of a benefit to pass up. Remember you can not only contribute to a Roth IRA in your name, but also to an Roth IRA for your spouse as well, as long as you have earned more than the amount you want to contribute for the year.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. This brief summary is not inclusive of all information necessary to make a financial decision and is not a substitute for specific individualized tax or legal advice.