There’s always been a debate about which retirement plan is right for you…the 401k or the IRA. Experts say that you choose based on your discipline, income and tax goals.
Many people will opt for their employee-sponsored 401k plan simply because it’s the easier option. There’s nothing you have to do once you are enrolled. The money comes right out of your paycheck (pre-tax) and as such, will lower your taxable income come year end. Once you reach age 59 1/2, any distributions you make will be taxed at your current bracket.
On the other hand, one beneficial alternative is the Roth IRA. Money contributed in this type of plan is already-taxed income, thus there is no tax write off. The huge advantage here is that all distributions are tax-free once you reach age 59 1/2 and have had the IRA open for at least five years.
So of these two options, which is best for you?
With a 401k plan, you can contribute up to $17,000 for 2012 ($5,500 more if you’re at least 50 years-old) which is significantly higher than an IRA. Also, your employer might match your contributions usually up to 6% of your annual income and at a rate of 50%. Some downsides here are that your investing options are limited and fees could lower your investment dollars.
As for a Roth IRA, the max you can contribute for 2012 is only $5,000 ($1,000 more for 50+ year-olds). Adam Bergman, a tax attorney with the IRA Financial Group, says the biggest advantage of this investment form is that your money grows tax free. With income tax rates expected to increase in the future, Bergman says this could be “potentially tax efficient.” You are also in charge of what funds to invest in along with a substantially larger choice to choose from. If you make more than $183,000 jointly you won’t be eligible to invest in a traditional Roth IRA. Bergman notes that since 2011 there are no income restrictions for a Roth conversion, which means you can make a traditional IRA contribution and then convert the funds to a Roth IRA, which would be subject to tax.