Roth IRA vs. 401(k): Which Could Be Best for Retirement?

Choosing the right retirement savings vehicle for your unique situation could make a significant difference for your financial future.

Two popular options are 401(k) and Roth IRA accounts. But how do you decide which could work best for helping you achieve your retirement goals?

Consulting a fiduciary financial advisor can be a great first step to helping determine which retirement savings account could work for your specific situation. That's why we created a free tool to help match you with up to three financial advisors.

Click here to take SmartAsset’s free quiz and get matched with up to three vetted advisors in just a few minutes, each obligated to work in your best interest.

Research suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.¹

A 2022 Northwestern Mutual study found that 62% of U.S. adults admit their financial planning needs improvement. However, only 35% of Americans work with a financial advisor.²

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The Tax Conundrum: Now or Later?

The primary distinction between 401(k)s and Roth IRAs lies in their tax treatment.

With a 401(k), you can contribute pre-tax dollars, deferring income tax until you withdraw funds in retirement.

Roth IRAs are funded with after-tax money, allowing for tax-free withdrawals in retirement, including on investment gains.

But which approach could be more beneficial? The answer isn't always clear-cut, and that's where professional guidance can be invaluable.

A financial advisor can help you assess your current tax situation and project your potential future tax bracket to determine the most advantageous strategy.

Click here to get matched with up to three advisors who serve your area.

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The 401(k) Advantage: Employer Match

One significant benefit of a 401(k) is the potential for employer matching contributions. This is essentially free money that could potentially help increase your retirement savings.

Even if you're leaning toward a Roth IRA, it could be wise to contribute enough to your 401(k) to maximize any employer match offered.

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401(k) Benefits at a Glance:

● Potential employer match
● Higher contribution limits ($23,000 in 2024 for those under 50)
● Pre-tax contributions, potentially allowing for higher savings now

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Roth IRA Advantages:

● Tax-free withdrawals in retirement
● Flexibility to withdraw contributions (not earnings) without penalty
● No required minimum distributions at age 73

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401(k) + Roth IRA: The Best of Both Worlds?

Still unsure which option could be right for you?

Consider this potential solution: contribute to both. This strategy, known as tax diversification, could help provide flexibility and help hedge against future tax rate changes.

A financial advisor could help you determine the optimal balance between these accounts based on your unique financial situation and goals. This free quiz can match you with up to three financial advisors in just a few minutes.

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Making the Right Choice for Your Future

Choosing between a 401(k) and a Roth IRA isn't just about comparing features—it's about aligning your retirement savings strategy with your overall financial plan. Factors such as your current income, expected retirement lifestyle, and potential future tax rates could all play crucial roles in this decision.

Ready to get help optimizing your retirement savings strategy? SmartAsset's free tool can match you with up to three fiduciary financial advisors who serve your area in just a few minutes.

Each advisor has been vetted and is legally bound to act in your best interests. The quiz takes just a few minutes, and in many cases, you can be connected instantly with an advisor to have an introductory call.

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The information contained in this article is general and not specific to any individual's situation. The SmartAsset quiz matches you with up to 3 financial advisors to which you can compare and decide which to work with. You can consult a financial advisor about your inherited property and taxes. The SmartAsset quiz can't make a determination regarding your property and taxes.
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Sources:

1. "Journal of Retirement Study" (Winter 2020). The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Journal of Retirement study.
2. "Planning and Progress", Northwestern Mutual (2022)

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