WGN-TV Show Notes — January 13, 2004
Which is better, a Roth IRA or a 401(k)? WGN Money Saving Reporter Ilyce Glink is here with the answer from the mailbag.
Dear Ilyce: I want to invest in a Roth IRA, but don’t know exactly how it works. I have a 401(k) plan at work. Is a Roth IRA a better choice than a 401(k)?
Other than the fact a Roth IRA is a retirement account, it’s very different from a 401(k) retirement account. 401(k), 457(B) Keogh, simple and conventional IRAs are all accounts that you fund with pre-tax dollars. In other words, the way you contribute to these accounts is the cash is automatically deducted from your gross paycheck. So, they’re tax deductible, meaning that you pay less tax now because they lower your taxable income and then they grow tax deferred. That means you don’t pay any tax until you withdraw the money years from now.
With a Roth IRA, you’re dealing with after-tax cash. You can put in up to $3,000 per year (or up to $3,500 per year if you’re over the age of 50). This cash comes out of your savings, or your take home pay. The nice thing about the Roth IRA is that the cash grows tax-free forever and there are some estate-planning benefits as well.
Just remember, the Roth IRA is an account. Once you fund the account, you still have to choose an investment, whether you buy individual stocks, an index fund, bonds or just leave it in cash.
Jan. 13, 2004.