Should we use a Roth IRA or a 401(k)?

Ask NJMoneyHelp

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Q. My husband wants to invest in a Roth IRA instead of his 401(k). I think that’s a mistake. What do you think?
— Wife

A. There are many variables that will determine the best way to save.

In a perfect world, you’d do both, but not necessarily in equal amounts, said Bill Connington of Connington Wealth Management in Fairfield.

Much depends on your expenses and how much you are able to sock away, he said.

He recommends you fill up the 401(k) bucket first, in part because of the matching funds your company might offer. That’s free money and you shouldn’t leave any of it on the table, Connington said.

Also, 401(k) savings grow tax-deferred until you need to withdraw for retirement.

Plus, he said, the 401(k) contributions are before tax, so you will save on federal and state taxes when you make the contribution, and then pay tax upon withdrawal.

A Roth IRA is a far different savings vehicle than a 401(k) plan.

“A Roth IRA is funded with after-tax dollars that grow tax-free for the rest of your life and that of your spouse, and they have tax advantages for your heirs as well,” he said. “You can also take early distributions of the principal that you contribute, without penalty or tax, should you run into a cash crunch.”

After you have maxed out your 401(k) at least to the extent that you get the free matching funds, shift to a Roth IRA, he said.

The downside of a Roth IRA is that you lose the immediate tax deduction that you get with a 401(k) contribution.

“Still,“you eliminate the uncertainty of what future tax rates may do to your retirement income plan,” Connington said. “If tax rates go up, as many believe they must in the years ahead, your 401(k) savings will become a little less valuable. But your Roth IRA savings will be unaffected.”

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