Smart Retirement Choices: 401(k) Plan, Roth IRA Or Both?

Business.com / Finances / Last Modified: February 22, 2017

Of course, everyone retires someday but if you wish you to have a relaxed retired life, you need to act now while you're still employed.

Have you made any plans for your retired life?

Of course, we all have to retire someday but if you want to have a relaxed and comfortable retired life, you need to take immediate action while still employed. The efforts you make and steps that you take at present decide your future. Sow those retirement seeds today and reap the fruit in future. 

In order to live a happy retired life, the most imporant thing to do is make smart retirement saving plans today. There are a number of retirement savings options that will fund your life post-career, including 401(k) and Roth IRA. But which one is best, or should you be utilizing both? Below is insight into the pros and cons of both, and why it might be best to choose one wisely.

Related Article: What Can a Retirement Consultant Do For Your 401(k)?

Retirement Plans – A Brief

There are a variety of retirement plans offered by employers in the US. There are annuities and index funds, but due to some important attributes, 401(k) plan and Roth Individual Retirement Arrangement (IRA) stand out among all other alternatives. Both of them have proven to be prudent and viable than others although both plans have different characteristics and nature. However, when it comes to planning a retired life, smart people usually weigh these two options. 

401(k) & Its Attributes

Employers typically favor 401(k) retirement plan, which allows the employees to either defer some of their salary or take compensation in cash. The amount that has to be deferred under this arrangement is suggested by the plan itself and is not taxed until it is withdrawn. Another option this plan gives to employees is to make contributions on an after-tax basis which no longer remain tax deductible at the time of withdrawing.

Hence, employees can go with either of the two alternatives provided by the plan, which they find appropriate and suitable. Also, the plan offers several money saving and investments options, which makes this retirement plan more attractive. It is not only a popular retirement plan but is said to be the most qualified alternative.

However, unless an employer offers this plan, the employees of that particular company cannot avail the benefits of this retirement plan. In that situation, people may like to opt for another viable substitute, which is Roth IRA.

Does your employer offer 401(k)? Well, if you are associated with a small business, chances are that you will be able to avail the benefits of this retirement scheme. An interesting revelation here is that the 401(k) retirement plan is gaining more popularity among small business owners. This happened after the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) brought some changes and altered the plan. After these modifications, the plan has become more flexible and beneficial for small company owners.

Related Article: Viable 401(k) Alternatives for Retirement Savings

Roth IRA as a Retirement Plan

A Roth IRA permits an individual to have his investments in securities such as bonds and stocks. The salient features of this retirement plan include tax deductions on the limited amount of saving. In short, tax is cut on the money withdrawn from the plan during retirement instead of reducing it from the money placed. Overall, this retirement plan offers flexibility when it comes to tax deductions, but this plan doesn’t offer open investment options like the former plan i.e. 401(k).

The investment options available in this arrangement are dependent on either the place where a retirement plan is established or on the trustee.

Are you confused about which one to choose?

We have some figures for you that might help you in decision making. A firm that rates retirement plans has revealed that most profitable retirement plans provided $12,000 to $20,000 to the average workers per year to use it in future, amount higher than their pays.

You know which one are the most lucrative plans.

Evaluation

Roth IRA offers better tax structures and provides tax flexibility as well. However, 401(k) retirement plan allows employees to contribute more and thus offer greater flexibility in terms of contributions. Each with their certain pros and limitations are still considered better and reliable retirement plans than other options.

Securing your future is essential to live a happy and relaxed retired life and a fortified future is only possible if you take smart steps and decisions during your employment. Assistance of a retirement planning specialist can be crucial, but popular retirement plans speak for themselves.

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