One of the biggest questions I get asked all the time. Should I invest in a Roth IRA or a 401k account?
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What Every Investor Should Know About Planning And Saving For Retirement
I want to talk about Making A Contribution To An IRA Account. More specifically, I want to talk about making contributions to a Roth IRA account.
Now, for many people, making contributions to IRA accounts is something that has kind of fallen by the wayside a little bit. And, one of the primary reasons for that, I think, is because 401K plans have become so popular over the last couple of decades or so. And 401K plans do have a couple of things going for them.
Number one is that they can be very convenient. So, once you enroll in your 401K plan money just comes right out of your paycheck automatically and goes into the 401K. So it’s a very convenient way to save money for your retirement.
If any of you have watched my other videos or read some of my other blogs, you probably know that the 401K plan is not my favorite choice for saving money towards retirement. And there’s a couple of reasons for that. Number one is the lack of investment choices. So, even some of the best 401K plans that are out there typically only have maybe a dozen to a few dozen different choices as to where you can invest your money. And even if you like the investment choices that you have today, the company is under no obligation to keep those investment choices for the future. They can change that any time they want to without any warning whatsoever. And the other thing about 401K plans is your money is typically locked up. In other words, you can’t take the money out and change it over to something else if you don’t like what they’re doing or like the investment choices. Your money is typically locked up until you either separate service from the company or you turn 59 1/2, generally speaking. And then the last reason for 401K plans, and this is something else I’ve talked extensively about on the blog, is that, sometimes the 401K plans can be pretty expensive. Especially if you work for a small business or a smaller company that doesn’t have a lot of assets in the 401K. Some of those 401K plans can get quite pricey. Now there are a couple of good things, again, about 401K plans. Number one is the match. If you have a 401K plan and your company is matching any part of your contributions, I generally recommend contributing at least enough to the 401K plan to make sure you’re capturing that full matching benefit. So even if you don’t like, necessarily, or you’re not crazy about the investment choices that you have, it’s hard to pass up that free money.
Beyond that, beyond taking advantage of the match, my next favorite choice, as to where you could be saving money for retirement, is a Roth IRA account. And again, I think this is something that a lot of people have kind of forgotten about, and really, again, put most of their emphasis on the 401K plan. But, as you may know, you’re allowed to contribute up to $5,500 to a Roth IRA account if you’re under 50 and if you’re 50 years old or older, you can contribute up to $6,500 a year. And if you’re married, you can also contribute those same amounts for your spouse. $5,500 if you’re under 50 or if your spouse is under 50, and $6,500 if your spouse is 50 years old or older. And what I like about the Roth IRA account are a couple of things. Number one is, depending on where you have the Roth IRA, you can pretty much invest it in almost anything that you want to. So you have almost an unlimited choice for investment options within the Roth IRA account.
The other reason I like the Roth IRA account is I’m a big believer that I think tax rates are relatively low right now, and in my opinion I think tax rates are more likely to go up in the future than they are to go down. And so for that reason it makes sense to do a Roth because you pay the taxes now and then as long as you’re taking the money out in retirement as a qualified distribution, you don’t pay any taxes on the growth of that no matter what the tax rates may be in the future. And then the other reason that I like the Roth IRA account too, is that it gives you a little bit more flexibility because any money that you put into a Roth IRA account, you can always pull your original principal out at any time, even before retirement, and you can do that without paying any taxes or any penalties. So even though it wouldn’t be my preferred way to tap into, get some extra money, you do have that ability with a Roth IRA account, to be able to take that principal back out at any point and use that if an emergency were to come up.
So if you haven’t been thinking about the Roth IRA account recently, I would strongly encourage you take a look at it, again, after you’ve maxed out the match, the Roth IRA I count as my next favorite option. One last thing I do want to talk about though, is the Roth IRA kind of does have some restrictions as far as income levels, and basically, if you are married and you’re filing a joint tax return, you start to lose the ability to contribute to a Roth IRA account once your income hits $183,000 and if it goes over $194,000 for total household income, you can’t contribute at all to a Roth IRA account. And if you’re single, those numbers are $117,000, your contribution levels start to get phased out for the Roth and over $132,000, you do not qualify for making a contribution to a Roth. There is a couple of strategies you can use where you can still, even if you’re over those income levels, still contribute to a Roth IRA. In fact I’ve got a video that’s on that. I think the title of it is How to Contribute to a ROTH IRA even if you make over the income levels.
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I help individuals make the transition from working to retirement.
As you approach retirement you will be making some of the most important financial decisions of your life. Most of these decisions don’t get a do-over, once you’ve made them your stuck.
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