• Daniel Snitkovskiy

Should I invest my money in a 401(k) or a Roth IRA?

The first question to ask is whether or not you have an employer match in your 401(k). If you do? Absolutely max that 401(k) match, it's free money!


Now let's say you've maxed out your employer match, and have $X to contribute to either a Roth IRA or your 401(k)*. There are 3 things to consider:

*Note: When we say 401(k), we mean a Traditional 401(k), not Roth 401(k).


1. ✅ Eligibility

Roth IRA's have a limit based on your MAGI: if your MAGI is more than $139K, you can't directly contribute to a Roth. You can explore a backdoor Roth, but that can be a barrier given how delicate a process it is to pull off. 401(k)'s do not have any income restrictions to contributing.


2. ⚖️ Pre-tax vs. Post-tax

401(k)'s offer pre-tax contributions (tax on withdrawals, deductions on contributions), whereas Roth IRA's offer post-tax contributions (tax on contributions, tax-free withdrawals). If you expect to have higher taxable income when you withdraw, the Roth will save you more. Otherwise, go with the 401(k).


3. 📈 Annual Limits

For 2020, you can contribute up to $6K in a Roth IRA and $19.5 K in a 401(k) for the entire year. These limits are separate, so you can contribute towards one without affecting the other.


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Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

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