Should You Invest in a 401k or a Roth? All Posts / Frugal Living / Saving Money

*This is a guest post by my friend Trisha of That Dang Vegan.  

Studies show that about 40% of millennials don’t have a retirement plan in place. This doesn’t necessarily add up to laziness or a lack of care for the future. Many of us are just doing what we can, in the moment.

These studies also show that most of us are optimistic about the future and plan to do what we can do prepare for retirement, when we have to. Well, as they say, there’s no better time than the present.

So, if you’re ready to start planning for the future, here’s a breakdown of the two most popular savings options and why they are great for millennials.

Benefits of a 401(k)

A 401(k) is a pre-tax contribution – this means that your contributions to your 401(k) reduce your taxable income for the year.  You will likely owe less in taxes if you contribute to a 401(k). The entire amount deducted from your paycheck goes directly into your savings account.

This is especially great if you are a struggling college student surviving on student loans and/or a part-time job. You’ll need all the money you can get.

Since this is an employer-sponsored account, your employer may contribute to your 401(k). Any amount that your employer is willing to contribute equals free money in your account – definitely take advantage of this! This can be a huge help towards catching up on retirement savings.

401(k) accounts allow much larger contributions than Roth IRAs. Anyone under 50 is allowed to contribute up to $18,000 to their 401(k) annually. If you sell a home or car, receive an inheritance, win the lottery, or just happen to have 18 grand lying around, it’s not a bad idea to invest it.

Signing up for a 401(k) is very simple. The money usually comes right out of your paycheck and the company holding the account does all the hard work for you. The funds that you contribute will be invested in many different stocks and investment opportunities that may yield some additional returns.

Employer contributions do not count towards your $18,000 contribution limit. Even if your employer is matching every cent that you add into your account, only your earnings and contributions are counted towards filling up that account. More money for you!

Benefits of a Roth IRA

This is the perfect type of account for young professionals. Anyone who earns less than $117,000 each year can contribute to a Roth IRA. In addition, you can contribute up to $5,500 each year to the account. If you add that up over 40 years you’d be looking at $220,000 alone.

If you’re a newlywed, you can create a second account for your spouse, which can have the same amount of contributions each year – up to $5,500. So, if you’re really trying to save, the Roth IRA has you covered.

Not all of us have been contributing to a retirement account since the beginning of our working careers, so if you have some catching up to do this is a perfect option for you.

If you’re thinking about purchasing your first home, an IRA account will allow you to withdraw a down payment penalty free up to $10,000. It absolutely has to go towards the purchase of a property and the only downside is that your account must be open for at least 5 years before this option becomes available. However, if you are thinking about settling down and purchasing in the future, these are things to think about right now.

Under age 59 ½ you can also withdraw money for certain education expenses such as books, tuition, or room and board. You will have to keep in mind that these are subject to tax, which can take a significant chunk out of your savings. Yet, if you are continuing some higher education, this can truly be a lifesaver.

Finally, each contribution that you make will be after-tax. This means that the money in your account will already be taxed by the time you plan to withdraw it for retirement. You won’t have to worry about paying tax on your retirement fund later in life. Just one less thing to worry about.

You Can Have Both

Both of these accounts are wonderful for millennials and young folks in their own way. If you’re really serious about saving for the future you don’t actually have to choose between a 401k or Roth IRA – you can actually have both!

Making contributions to both accounts allows you to have the best of both worlds. Your employer can help you save for the future and you can safely put money aside on your own for when you need it most.

What do you think? Should you invest in a 401k or a roth?

Other stuff you might like:

My Personal Finance “Aha” Moment
How We’re Preparing Financially for a Pug Puppy
Why I’m Grateful for My Student Loan Debt
The Appeal of Minimalism
9 Ways to Get Free Yoga Classes

Personal Finance Resources:

The Total Money Makeover by Dave Ramsey
YOLO: The Roadmap to Financial Wellness and a Purposeful Life by Jason Vitug
Smart Women Finish Rich by David Bach
It’s Only Money and It Does Grow on Trees by Cara MacMillan

Blogging Resources:

How to Blog for Profit Without Selling Your Soul by Ruth Soukup
365 Blog Topic Ideas for the Lifestyle Blogger Who Has Nothing to Write About by Dana Fox
ProBlogger: Secrets to Blogging Your Way to a Six Figure Income


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