Is a Roth IRA Better Than a 401(k) Plan?

Most people will tell you that you should always put money in a 401(k) first. It is considered conventional textbook wisdom.

Let’s first think about the phrase “most people” or “the experts” or “they.” People who are successful in investing possess a common trait. They think differently than everyone else. They question how things are supposed to be done. They think outside the box.

So, we are going to think out of the box on this one.

I would suggest that the 401(k) plan has only two benefits. The first is the free matching money. You always want to make sure that you take full advantage of the matching money. If they are going to match dollar for dollar up to the first 4%, then you want to at least put in the first 4%. The second benefit is the ability to put large sums of money back for retirement on a pre-tax basis.

If you are able to put large sums of money back, then the 401(k) plan is probably the best route to take. If not, consider utilizing a Roth for the rest of your contribution.

A Roth gives the greatest tax advantage available by allowing you to never pay taxes again on any money that is deposited. What is the disadvantage? You don’t get a tax deduction on the deposit. Choosing between a small deduction on the initial deposit versus a tax free income down the road is a no-brainer.

This is the beauty of the Roth. Everything that is deposited, as well as the investment growth that you experience until retirement, is all tax-free upon withdrawal.

The other advantage is that you will be able to put back $ 4,000 with an additional $ 1,000 if you are over age 50 for 2007. For 2008, that increases to $ 5,000. What is the drawback? If you are single, your adjusted gross income has to be lower than $ 95,000 to get to invest the entire amount allowable. Over $ 110,000 in adjustable gross income, and you cannot participate. If you are married, that rises to $ 150,000. Over $ 160,000 and you lose the ability to participate.

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