Roth IRA Comparisons

Making Roth IRA comparisons to 401(k)'s, traditional IRA's, and 403(b)'s is a great way to find out whether or how much you should contribute to your various retirement account options.

Otherwise, it's more difficult to figure out the tough questions...

Should you put $1,000 in your Roth IRA or your Traditional IRA?

Should you contribute a higher percentage to your Roth IRA or your 401k?

Roth IRA comparisons help you figure which strategy is best.

By comparing the advantages and disadvantages of each retirement savings option, you provide yourself with a much better picture of the course of action you need to pursue.

Roth IRA Benefits & Advantages

We already tackled Roth IRA benefits and Roth IRA advantages, but just to reiterate...

What are the benefits of a Roth IRA?

1) Tax-Free Growth - Once you contribute to your Roth IRA, it grows free of capital gains taxes and income taxes until you choose to withdraw funds in retirement.

2) Tax-Free Qualified Withdrawals - Qualified withdrawals from your Roth IRA, even if made prior to age 59 ½, are tax-free. You don't owe any capital gains taxes or income taxes on your investment gains.

3) Penalty-Free, Tax-Free Principal Withdrawals - Unlike most tax-advantaged retirement accounts, you can withdraw your original Roth IRA contributions without triggering any taxes or penalties.

4) Penalty-Free, Tax-Free Withdrawals After Age 59 ½ - Also, unlike most tax-advantaged retirement accounts, as long as you've met the 5 year holding requirement, you can withdraw funds from your Roth IRA after the age of 59 ½ without incurring any penalties or taxes.

So those are the benefits and advantages of a Roth IRA, and they're extremely beneficial. So are there any notable disadvantages?

Yes.

1) Tax Deductibility - This is the most notable disadvantage of a Roth IRA compared to other retirement plans. Contributions to your Roth IRA are not tax deductible, so you don't gain any significant income tax advantages by contributing to your Roth IRA.

So when making Roth IRA comparisons to other accounts like a 401k, a 403b, or a Traditional IRA, you need to take the above factors into consideration.

Simply ask yourself, "Does this account feature..."

• Tax deductibility?
• Tax-free growth?
• Tax-free withdrawals?
• Tax-free contribution withdrawals?
• A minimum or maximum age for withdrawals?
• Annual contribution limits?
• Maximum income contribution limits?
• And more...

Only by asking lots of questions and making Roth IRA comparisons to other accounts can you determine the retirement savings course of action which is just right for you and your family.

Roth IRA vs. Taxable Brokerage Account

As an alternative to a Roth IRA, you can always invest your after-tax savings in a traditional taxable brokerage account. But is this a good idea?

Very rarely.

About the only advantage a taxable brokerage account can offer is the ability to withdraw investment gains anytime penalty free. Of course, you still owe capital gains or income taxes on those gains, so it's not a decisive advantage.

In the meantime, you can't grow you money tax-free until retirement like you can in a Roth...

So if you qualify to contribute to a Roth IRA, it seems likely you'd want to make the maximum annual contribution before investing any funds in a taxable brokerage account.

Roth IRA vs. Traditional IRA

Another possible alternative to a Roth IRA is a Traditional IRA. There are quite a number of differences between these accounts, but the most commonly cited feature is tax deductibility.

A Traditional IRA is tax deductible, while a Roth IRA is not.

This can be a big advantage if deducting your IRA contribution pushes you into a lower tax bracket.

But on the flip side, you can't contribute as much... While it's true that the annual contribution limit is identical for both accounts, tax-deductible Traditional IRA contributions will be taxed upon withdrawal, which makes your savings worth significantly less than a non-tax deductible Roth IRA which will never be taxed again.

So there's a lot of considerations to take into account when comparing a Roth IRA and a Traditional IRA.

Also realize this isn't a case of one or the other. If you qualify to contribute to a Roth IRA, you can contribute to both a Roth and a Traditional IRA, but the maximum amount you can contribute to your Roth IRA applies across both accounts.

So if you're eligible to contribute $5,000 to your Roth IRA, you can contribute $3,000 to your Roth and $2,000 to your Traditional IRA, or any combination thereof that equals $5,000.

A Roth IRA vs. A 401k

If eligible, you can contribute the maximum to both your Roth IRA and your 401k without having to choose one over the other, but it's still a good idea to make a comparison between the two.

Why?

Well, in addition to understanding the benefits offered by each plan, a 401k vs. Roth IRA comparison can help you determine how much you want to contribute to each plan if you're not in a position to contribute the maximum amount to each.

For instance, let's say you can only afford to contribute $15,000 toward your retirement this year...

Should you put it all in your 401k?

If not, what percentage of your available funds should go into the various plans available?

Should you max out your Roth IRA first?

Making a Roth IRA comparison of the features and benefits of your Roth relative to your 401k can help you answer these questions and more.

A Roth IRA vs. A 403b

403b accounts are only available to people in certain industries, such as education and non-profit work. So make sure to check with your employer to see if you're eligible.

As with your 401k, you can contribute to both a Roth IRA and a 403b. But you still want to run a comparison to figure out which option is the best.

For instance, both a 401k and a 403b are commonly associated with employer match contributions, which essentially provides the account holder with free money.

You need to take your specific plan's options into account when making a decision in regard to how much you should invest in a given retirement vehicle.

In addition, a 403b offers a greater maximum contribution limit than a Roth IRA. However, this is offset by the limited investment options at your disposal. Generally speaking, you can't invest in individual stocks with a 403b.

As with the previously mentioned retirement accounts, you need to consider tax deductibility and its effect on your personal income tax liability.

That's one of the many benefits of making a Roth IRA comparison.

Conclusion

A Roth IRA is a great investment vehicle for your retirement savings, but it's not the only option at your disposal. Make some Roth IRA comparisons, and make sure you explore the possibility of funding a Traditional IRA, a 401k, or a 403b as well.

If you're eligible and have the means to fund them, it's certainly possible to contribute a maximum to your Roth IRA, your 401k, and your 403b.

So do your homework. Explore the options available to you.

A Roth IRA comparison helps you realize the benefits of your Roth IRA relative to your other retirement account options, and this enables you to make a plan for funding your future. Stick to the plan, and you're on your way to a financially comfortable retirement!

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