IRA verses, Roth IRA verses, 401K

[Guest kr402]

My husband contributes 4% of his salary to a 401K, but the company doesn't match funds. I've been told that if your contributions to a 401K are not matched, that a Roth IRA is a better deal, since earnings are tax free and you don't pay any taxes on your withdraws. Our CPA, recommends that we continue to contribute to the 401K even though it's not matched and put extra retirement money towards a Spousal IRA or Roth IRA, for me and a Roth IRA, for my husband. My husband isn't qualified to do an IRA, because of his income and since he has a 401K. I'm wondering if our CPA is basing her recommendation for participating in the 401K from tax advantage, since the contributions are taken out of salary, before taxes. I'm wondering if a Roth IRA isn't a better deal, than a IRA, or a 401K that's not matched, because you won't pay any taxes on the Roth IRA when you take withdraws, where as you pay taxes on the amount of contributions and the earnings, 100%, when you withdraw from an IRA, or 401K.

[dh003i]

If you're company is not matching your 401k contributions, you almost certainly shouldn't be investing in the 401k.

You should either be investing in a Traditional or Roth IRA, if you can. If contributions aren't matched, a Traditional IRA is better than a 401k or 403b because you have better investment flexibility.

A Roth IRA is better yet, because your money can grow tax-free. Tax-free growth will almost certainly be better than tax-deferred growth, even if your initial contributions are tax-deductable, and this advantage will increase with time and with greater growth. Also, with a RothIRA, you can take out your initial contributions anytime you want, tax-free. Another nifty advantage is that your heirs inherit the Roth IRA tax-free.

The other nice thing about a Roth IRA is that -- under certain circumstances, which I don't think you meet, unfortuantely -- you can get a tax-credit for a RothIRA contribution up to half the contribution amount.

[BPickerCPA]

Kr,

If you can afford to fund the Roth IRAs even with the 4% coming out for the 401k, then that is definitely the way to go. It becomes a difficult question only when you are faced with an either/or situation. Then you have to decide if you're better off with the current tax deduction, or the prospect of tax free income in the future. There are compelling arguments both ways, and you'll have to then make that decision.

[Guest djsnorskie]

I would slightly disagree with one of the replies stating that IRA is better than 401 as to investment flexibility. It all depends on the 401 and the IRA!! My 401 is self directed and I can get anything that an IRA can plus I can take out a loan if needed. Also the credit referred to for the Roth IRA is also available for the 401 contribution.

[MGB]

I would add to the 401(k) side: Depending on the plan and its selection of investment options, you could get access to professional asset management/diversification at a very low cost. If the person is not an investment professional, making their own investment decisions in an IRA can be disasterous. Of course, they can pay for professional advice, but at this level of money, I doubt that it is worth it.

"A Roth IRA is better yet, because your money can grow tax-free. Tax-free growth will almost certainly be better than tax-deferred growth, even if your initial contributions are tax-deductable, and this advantage will increase with time and with greater growth."

This statement (from another post) is not universal. A person's individual situation (age, expected date of starting distributions, tax brackets now and expected in the future, etc.) must be modelled to determine which is better.

And, although it usually isn't an issue, if the person has financial difficulties, there are different rules on protection of assets from creditors in bankruptcy between the different options.

[dh003i]

The advantages mentioned of 401k's are true. You may get professional diversification advice (note that diversification isn't necessarily a good thing). However, in many cases, the tax-free growth of a Roth IRA is advantageous over the tax-deducted tax-deferred growth of the 401k. This becomes more and more the case as your time-frame increases.

True, you can take out a loan against your 401k, and then pay yourself back. But with a Roth IRA, you can take out the totality of your initial contributions, without paying interest (even if it is to yourself).

Also, remember, that you can apply any "professional advice" you get from your 401k professionals to your Roth IRA. If professional advice is offered on a 401k for free, set one up with the minimum funds, to get that advice; then apply it to all your investments.