Here's The Key To Choosing Between 2 Common Retirement Accounts
Unless you never intend to leave the workforce, the sooner you start saving for retirement, the better.
There are several retirement accounts to choose from, though, and deciding which one is right for you can be tricky.
According to certified financial planner Sophia Bera, "it all comes down to taxes."
In her upcoming book, "What You Should Have Learned About Money, But Never Did," Bera discusses two retirement accounts — a 401(k) offered by your employer, and a Roth IRA.
The author says these two accounts are the ones millennials most commonly ask her about when discussing retirement.
Bera says choosing between the two has everything to do with the tax bracket you're currently in. If you're in a lower tax bracket, and earn less than $131,000 a year ($193,000 if you're married) Bera recommends looking into a Roth IRA.
If you’re in a lower tax bracket like the 15% or 25% bracket, then you might want to contribute to a Roth IRA, especially if you think you'll be in a higher tax bracket in the future.
Since you fund your Roth IRA with after tax dollars, you may be better off contributing to your Roth IRA now, and then you won't have to pay taxes when you withdraw the money from your Roth IRA in retirement.
On the other hand, since you get a tax benefit on the money you contribute to a 401(k), but you have to pay taxes when you withdraw the money in retirement (much like with a traditional IRA), Bera says this might be a better option for those in a higher tax bracket.
The higher your tax bracket, the bigger tax benefit you receive in your 401(k).So if you're in the 35% tax bracket, then you'll probably want to contribute the maximum to your 401(k), which is $18,000 per person, per year, for 2015. If you earn $200,000 but contribute $18,000 to your 401(k), then you'll only pay taxes on $182,000.
There's one exception to this rule, though. Bera says that you may want to skip the 401(k) in favor of a Roth IRA if your company doesn't offer an employer match. According to the author, an employer match is essentially "free money," so if your company doesn't offer this, a large part of the benefit of opening a 401(k) is gone.