What's the Difference Between a 401(k) and Roth IRA?
Find out how saving now can really matter later.
Thanks to compound interest the more you save now could really pay off later in retirement.
So how do you do it? By saving in a reliable retirement plan like a 401(k) or a Roth IRA.
401(k)s are employer-offered savings plans, in which you can are able to contribute pre-taxed dollars from your paycheck, and often have those contributions matched by your employer.
Your first step is seeing if your job has automatic enrollment. Morningstar experts recommend you start with whatever you can afford, but ideally up to the level of your company match.
Don’t leave free money on the table.
Given that 401(k)s are designed to benefit you down the road, you can think of them as a way to pay your future self.
Note: Since you’re contributing pre-taxed dollars, they will be taxed when you start withdrawing them down the road.
A Roth IRA is very similar to a 401(k), but it has one major difference. With a Roth IRA, you pay taxes on any funds up front, instead of when you withdraw. So if you think you’ll be in a higher tax bracket in retirement than you are today, this might make sense as a good way to save on taxes later on.
Of course, the earlier you open an account, the better, because your contributions will grow through compound interest. Still, if you haven’t done it yet, there is no better time than the present.