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Roth IRA vs 401K retirement saving plans (for USA residents)

BY: Jessica | Category: Business and Finance | Post Date: 2009-09-12
 



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   Jessica
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Saving for retirement has always been one of my side goals of life. We live in a world where everyone cares only about living in today without saving anything for their retirement. When we get old with little or no savings and face the daunting reality of life, it may actually be too late. We are left with two options, either continue to work till the last breath or try to totally on one of the social programs of government like social security, food stamps and homeless shelters. It is extremely important to save for the retirement early in life to live a beautiful life we always imagined.

The two best programs to save for retirement for most people are Roth IRA and 401K savings account. Both Roth IRA and 401K saving plans have tax advantages and the maximum contribution limit on each one is preset by government at the beginning of each year. For example for year 2009 you can put $16500 in 401K retirement saving plan and $5000 for Roth IRA retirement saving plan. Citizens more than 50 years old can contribute a bit higher than others. In both plans you can withdraw money without penalty at the age of 59.5 years or more. There are some exceptions which are beyond the scope of his article.

Basics of 401K retirement account:
For most people like me who are employed (salaried employees) can put about a maximum of 16.5K per year (2009 figure). I believe that a person should be atleast 21 years to participate in 401K retirement saving plan. The best part of 401K plan is that most employers also throw in couple of grands based on their matching policy. All contributions made in this scheme are pre-tax and the tax is paid only when you withdraw the money during retirement. You can take loan against retirement plan and must repay if you plan to intend to temporarily withdraw money before 59.5 years of age. If you do not replay, all that money becomes taxable plus there is a 10% additional early withdrawal penalty. You can invest money in stocks, stock mutual funds, bond mutual fund or capital preservation funds. All depends on what your company has to offer. After you leave the company and you have substantial amount left in your 401K account, you can either leave it in your company sponsored 401K plan, transfer into a new 401K plan or the best is to put into a regular IRA (nor Roth IRA) retirement account. Even if you do not contribute maximum allowed, it is recommended to atleast match your company's contribution, as your company's contribution is like free money. 401K also helps to reduce your Adjusted Gross Income, therefore may put you in a lower tax bracket.

Roth IRA retirement saving plan:
You can contribute up to $5000 (year 2009 limit), after tax money. Money grows tax free and you need not pay taxes again during the time of withdrawal. Roth IRA's are my personal favorite. There are certain minimum and maximum salary limits under which you can contribute money, but 90% of all working people qualify. Similar to 401K retirement account, money in Roth IRA is also invested in stocks, bonds or capital preservation funds. You can open accounts in a variety of companies like Scottrade, TD Ameritrade, Fidelity, Vanguard and many others.

Every working individual should definitely put money in either of Roth IRA or 401K retirement saving plans for a better future.

Article Source: http://www.saching.com



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