Decisions play very important roles in our lives. Therefore, talking about decisions it is always imperative for every individual to plan and think about his golden period when you are old and jobless.
Among other decisions in life, it is also very important that, how you are planning about funding your retirement. Your retirement might be a long period of your life, and you have to do planning in such a way so that you can easily fulfill your needs for the rest of your life. It is therefore, very significant for every individual to understand the difference between Roth IRA vs. 401k.
This article is to explain every thing between these two kinds of tax qualified plans.
So, first just try to understand what are IRA and 401K. IRA and 401k are two tax plans on which IRS (Internal Revenue Service) gives special tax-relief and it is a great way of saving for retirement. It is also important to note that both these types of accounts have different requirements and benefits. You can choose the account that best suits your needs if you fulfill those requirements.
People who work for any company can contribute to 401K plan while Roth IRA are for those people whose adjusted total income falls below the yearly limit. Furthermore, 401k plan is completely tax-deductible at the end of the 12-months period.
Tax reliefs & Tax breaks
There is also a tax relief in both plans as your income in both 401k and Roth IRAs increase. Therefore, in simple words, you get a tax break for some period.
On the other hand, 401k plan, payments are not included in your payable earnings, but you have to pay tax on it while you make any withdrawal.
The Roth IRAs has different conditions as compared to 401k plan as it does not give you any tax break for the income that you have in your account. The Roth IRAs plan allows you to make tax-free withdraws when you are about 60.
There are also different investment options available with these two tax qualified plans.
If you have the 401k plan then you can make investment with the investment plan that your company offers. On the other hand, Roth IRA plan allows more flexibility. You can invest in any plan you want except collectible things, as these are against Internal Revenue Service terms and conditions.
One other difference between these two tax-qualified plans is the matching difference. In 401k, your employer allows you to make match of all or part of your income while in IRA plan you cannot make match, as your employer cannot offer you this.
The contribution limits in both these plans are also different.
The contribution limit in 401k is greater compared to Roth IRA. The contribution limit for the year 2010 in making investment in a 401k plan is $16500 and this increases to $22000, if a person is 50 or above years of age.
On the other hand, in a Roth IRA plan, you can investment $5000 maximum but for elderly people this limit exceeds to $6000 (50 years of age or above).