Because Roth IRAs use dollars that have already been taxed, there are fewer rules governing them. For example, unlike 401(k)s, there’s no age at which you must begin drawing on your Roth IRA. However, there are two important guidelines to keep in mind:
- There is a limit to how much you can contribute to your Roth IRA; for 2013, the limit is $5,500
- Some people make too much money to contribute to a Roth IRA. Currently, single adults making more than $112,000 ($178,00 for couples) per year cannot use Roth IRAs
Roth IRAs offer an additional benefit for those who value flexibility: if you want to withdraw the contributions (not the interest) you’ve made to your Roth IRA, you can do so at any time without having to pay taxes or a penalty.
Which is Best for You?
So how should you decide if a 401(k) or Roth IRA is right for you? It’s always an option to utilize both, but if you’d prefer to choose one of the other, consider a 401(k) if:
- You prefer the convenience of a payroll deduction to contribute to your retirement account
- Your employer offers to match your savings – you should never give up free money!
- You’d like to lower your taxable income now
- You believe that your income (and, therefore, income tax rate) will be lower in retirement than it is now, which means it’s sensible to defer paying taxes on your savings
- You make too much money to contribute to a Roth IRA
On the other hand, you should consider a Roth IRA if:
- Your employer doesn’t offer a 401(k)
- You believe that income taxes will be higher in the future than they are now, which means it makes sense to pay taxes on your savings now
- You like the idea of your savings growing tax-free
- You like the flexibility of being able to tap your contributions if you need to without paying taxes or penalties
With the variety of retirement account options out there today, choosing the right one can be tricky. To help get you started, we evaluated over 70 Roth IRA providers to help find the best one for your needs.
Written by by Lindsay Konsko