Today I will open up the new Retirement section with a simple comparison drawn between the Roth IRA and the 401(k).
The Roth IRA is the money you invest into your retirement after you have already paid your taxes. The 401(k) is the money you invest in your retirement prior to paying your taxes.
Passive Income Now will cover every aspect of passive income, which ultimately does cover retirement.
A 401(k) will reduce your taxes today, while the Roth IRA investment will reduce your taxes in the future.
Benefits of the 401(k) as your retirement investment
Less taxes if you decide to retire on your 401(k). Your total amount of money spent on taxes will definitely be low if you choose to retire off your 401(k) income. You won’t have to put up with any extra income that could potential increase your yearly tax rate.
Allows you to make your own career decisions. Many people simply wish to remain at their current position within their respective company until retirement. This is fine. Some of us would like to focus more energy on enjoying life and doing the things that we enjoy. With the 401(k) you will deffer your taxes until retirement which in your case with your career is likely the better choice.
Your employer may match your 401(k) contributions. Many individuals are fortunate to work in a company where their employer matches their 401(k) contributions dollar for dollar. Please do take advantage of this free money (it reall is free). Tax benefits of the Roth IRA are great but nothing beats free money.
Benefits of the Roth IRA as your retirement investment
The Roth IRA has many benefits for entrepreneurs. Many entrepreneurs will not reach their highest income point until later on in life. If you need to have high amounts of money during retirement, it’ll be very helpful to receive some of that money tax-free, especially if the income tax rates are higher
The Roth IRA provides a tax shelter. If you have many sources of income (passive & active) then you are probably in a higher income tax bracket. As a result you could greatly benefit from placing a portion of your income into a non-taxable account.
The Roth IRA is ideal for the self-employed. If you are very entrepreneurial person then chances are that you do not even an employer, let alone an employer that will match your retirement contributions.
Now at the end of our discussion; Is there a compromise between the Roth IRA & 401 (k)? There of course is the Roth 401(k). An investment vehicle that deserves to be looked at in greater detail.
Now that we have compared the Roth IRA & 401(k) where do we go next? On PIN we will discuss both many more times in the future. As for the readers- do not let the paradox of choice or information overload prevent you from saving for your retirement. Start saving right now! Your opinion may change in a few years but that’s okay because you will already have the power of compound interest on your side. You can then at that point start investing into another retirement investment vehicle.