Could a Roth IRA be Better Than a 401(k)?

Very few people whom I know are familiar with the benefits of the Roth IRA. It was named for the late Senator William Roth of Rhode Island, who proposed it. It is similar to a traditional IRA except contributions are never tax-deductible. Contributions to traditional IRAs are sometimes deductible or partially deductible, depending on your income and whether or not you have a retirement plan like a 401(k) at work. With Roth IRAs, individuals are limited to incomes of $95,000 ($150,000 for couples) to be eligible for full contribution amounts.

However, unlike the traditional IRA, you can withdraw your contributions from a Roth IRA at any time, at any age without penalty. Earnings are not taxed if you wait until at least age 59 1/2 to begin withdrawing them and have held your Roth IRA for at least five years. With a Roth IRA, the contributions are taxed without any deferment, but they grow tax-free and the gains are never taxed (see above). With a 401(k), contributions are tax-deferred, but eventually the contributions and gains will be taxed. By the time most people retire, the earnings from their retirement accounts will far exceed their contributions, due to compounding. With that in mind, one could make the case for a Roth IRA possibly being better than a 401(k).

Here's an illustration. Let's suppose that over the course of 25 years you contributed a total of $75,000 to your 401(k) and your employer kicked in $30,000 during that same period for a total of $105,000. By the end of those 25 years, your compounded gains (assuming you're getting a decent rate of return) could total $500,000. When you retire, you will eventually pay taxes on the entire $605,000 as well as the gains you receive from it after retirement. Now, let's assume that, instead of contributing to your 401(k) for those 25 years, you contributed only $50,000 to your Roth IRA (without a matching contribution from your employer, of course). The assumption is also that you would not be able to contribute as much because you are using post-tax dollars for the Roth IRA vs. pre-tax dollars for the 401(k). However, because you generally have more investment options with the Roth IRA money than with the 401(k) money, you are likely to find a better rate of return. With that in mind, let's say your compounded gains could total $400,000. When you retire, you could have the entire $450,000 as well as the gains you could receive from it post-retirement, completely tax free!

As you can see, it is possible that many people could come out better putting at least a portion of their retirement funds into a Roth IRA. Judge for yourself. I actually contribute more to my Roth IRA than I do to my 401(k). I put just enough into my 401(k) to get my employer's maximum matching contribution, and that's all. However, I'm not a financial advisor and I don't play one on TV, so check with your financial advisor to see what would be right for you. For more information about the Roth IRA, see the following link: http://www.rothira.com.

Terry Mitchell is a software engineer, freelance writer, and trivia buff from Hopewell, VA. He also serves as a political columnist for American Daily and operates his own website - http://www.commenterry.com - on which he posts commentaries on various subjects such as politics, technology, religion, health and well-being, personal finance, and sports. His commentaries offer a unique point of view that is not often found in mainstream media.

---

10 Wisdom-Based Wealth-Building Strategies

"It's the business of your life?and you're the CEO!" Gala... Read More

Is Your Money Keeping Up With Inflation?

In today's unpredictable global economy, you obviously never know what... Read More

Turn Your Job Loss Into the Opportunity of a Lifetime

There are few things in life that are more stressful... Read More

Wealth And Your Net Worth

Most people know it's important to keep and organize all... Read More

Wealth Creation - Opportunity

When young men ask me how to succeed, I tell... Read More

Build Wealth From Home

As you sit in traffic, inching along between irate drivers,... Read More

Pay Yourself First - If the Only Thing You Did Was This, Youd be Rich

Bottom line. No exaggeration. No hype. If you want to... Read More

Trustees: Who Can You Trust?

Early in my legal career I represented two young women... Read More

Ben Franklin Didnt Quite Get it Right

When Ben Franklin said "a penny saved is a penny... Read More

Top 7 Lucrative Paper Businesses You Can Run

Why not run a lucrative paper business? Paper businesses do... Read More

How Should I Create Passive Income?

If you're wondering where to create passive income, then you... Read More

Trustee Fees: How Much is Enough and How Much is Too Much?

I am often amused by the ads and offers I... Read More

Why You Need To Buy and Sell Gold Coins (Part 4)

Top Investment PerformanceThroughout history, many coin collections have produced substantial... Read More

Wealth Creation and Mortgage Planning - Two Great Tastes that Taste Great Together

What if I were to tell you that almost everything... Read More

Have You Ever Had That Feeling?

Have you ever had that feeling where you could not... Read More

My Entrepreneurial Fire-I Grabbed My First Million Before I Got Too Old

My First Million took me exactly 27 months to achieve.... Read More

Residual Income - 3 Ideas for Long Term Profits

A residual income is one that comes in no matter... Read More

Starting With Smaller Goals First And Work Your Way Up Until You Achieve Financial Freedom

While you need to have a lot of positive-thought and... Read More

Saving Money By Spending Wisely

Why is it that the older and richer people become,... Read More

I Dont Need A Financial Coach To Help Me!

You've been thinking that your financial life could probably be... Read More

Are You Ready For Undesired Events?

Planning for the undesired, accidents and possible unknowns in life.... Read More

Endowments and Endowment Shortfalls - What You Need To Know

Endowments and endowment mortgages have received a lot of bad... Read More

Surefire Ways to Attain Moneymaking Success

You have probably heard other people say that "Money isn't... Read More

The Predicament of the Newly Rich

They are the object of thinly disguised envy. They are... Read More

The Morphing of Thought and Cash

Here are some thoughts about the morphing of thought and... Read More

10 Ways To Find The Money Hiding In Your Paycheck

No matter how tight things are financially for you; no... Read More

10 Ways to Save $50 Per Month: The Art of Pinching a Penny Until It Screams

1. Save up to 50% per month on convenience cleaner... Read More

Residual Income - The Myth

"Join our program and retire in 3 months..." yeah, right.We... Read More

Retirement Planning the Offshore Way

Retirement Planning the Offshore Way Why do so many of... Read More

Want Money? You Got It!

Six out of six people who were asked to list... Read More

Spiritual and Emotional Money Goals: The Keys to a Financially Free Future

Are you setting the right money goals?Most people believe having... Read More

Prosperity

An ellipsis to your success is hidden in the word... Read More

A Completely New Way To Get Rich Rapidly

This new way is catching on around the world. People... Read More