Roth IRAs, 401(k), and 403(b) – Which one is Right for Me?

The task of planning for retirement can seem confusing, but it doesn’t have to be. You can learn about the different options. But you’re probably wondering - Roth IRAs, 401(k), and 403(b) – Which one is right for me? The following overview of each might help you make that decision.

The Roth Individual Retirement Account (IRA) is less than 10 years old, but it has been widely used since its introduction. Contributions to this IRA are not tax-deductible, but the funds can be withdrawn tax-free after the age of 59 ½ if the account is five years old or older. The Roth IRA does allow for some early withdrawals without penalty, but you are limited in the amount of money you can contribute, only $2,000 per person for a joint account. If you won’t be retiring for a number of years, this might be a good match for your retirement plan rather than a traditional IRA.

A 401(k) is a defined contribution plan in which the employer makes contributions. The employee may make contributions, but they are not required. The amount of money you can have contributed to a 401(k) is considerably larger than an IRA, so they may have an advantage if your employer offers them. They also have the benefit of being transferable should you ever leave your current job. These funds may be left as they are, moved to a new 401(k) plan with your new employer, they may be rolled over into an IRA, or they may be dispersed as a lump sum. Remember, however, if you take the lump sum you will have to pay a penalty for early dispersal.

The 403(b) plan is similar to the 401(k) except that it is restricted to employees of educational institutions or staff of non-profit organizations (501(c)(3)s as determined by the Internal Revenue Service). They are tax-deferred until the funds are withdrawn, and are generally an addition to the normal pension plan that educational employees and non-profit organizations give their employees. Having a 403(b) will not affect your social security benefits, and this plan can be used by part time employees as well. This plan does not allow you to move your account without paying penalties, unlike the 401(k).

These short overviews for the Roth IRA, 401(k), and 403(b) plans are not exhaustive, but they might help you answer the question, “Roth IRAs, 401(k), and 403(b) – which one is right for me?” The person who can best answer that question, however, is a trained professional such as a financial planner or counselor. Remember, ultimately the choice belongs to you. Listen to the advice and then you choose based on the information you understand.

Understanding 401(k)... Is It For You?

401(k) plans are offered by a large majority of employers to help their employees save for retirement. However, there is much to learn about the 401(k) – details and explanations that will help someone decide whether a 401(k) is right for them or not.

Most employers provide tax-deferred investing to their employees in the form of the 401(k), which also helps to lower your taxable income because of the pre-tax deduction to fund the 401(k). However, you’ll want to leave money in the 401(k) rather than making withdrawals since the withdrawals will be taxable based on your tax bracket, along with having to pay penalties for early withdrawal.

There are restrictions to the 401(k) plan, based on what the employer chooses as investment opportunities. They are also limited by the 401(k) fund manager. Despite the restrictions, however, the 401(k) can be a wise choice for retirement savings.

A 401(k) is a defined contribution plan, meaning that you are not guaranteed a certain income upon retirement. The plan allows the employer and employee to make contributions to the employee’s 401(k). The amount of money you can contribute is generally set by the employer, and they will only match a percentage of what you contribute.

The longer you remain at your job, the more vested interest you will have in your retirement plan. The method for determining your vesting is determined by the employer and is usually related to the number of years you have worked for them and how long you have been contributing to the 401(k). Normally to become 100% vested, you will need to be employed for 10 years. Check with your human resources manager to determine the vesting rules for your company.

One major problem with a 401(k) and any other defined contribution plan retirement account is that you really don’t know how much money you will receive when you retire. Your nest egg at retirement will be based on how much money you contributed to the plan, what your employer contributed, and the performance of the investments in your portfolio. Seek the help of a qualified financial planner to help you decide if you should move your investments in order to get more of a return for your money.

Benefits of this type of retirement account include:

• Contributions are taken out pre-tax, so they lower your taxable income rate
• Contributions are sheltered when you make them
• Funds are often taxed at a lower rate when you withdraw them at retirement
• Your contributions and earnings are protected from income tax until withdrawal, which means the funds have more potential to grow.

Perhaps the biggest benefit of the 401(k) is the fact that it can be moved if you ever change jobs, usually without incurring any penalties. You may maintain the account as is (unless required to be removed by your employer), roll it over into another 401(k) account at your new employers, transfer it to an IRA, or make a withdrawal at the time. Remember, that making a withdrawal before you actually retire may cause you to pay stiff penalties and income tax on the withdrawal.

The 401(k) plan you have may be difficult to understand, but it doesn’t have to be. Speak with a qualified financial counselor to give you specific information about the 401(k) – details and explanations – to ensure you understand the benefits and potential problems of having this type of retirement account. Your financial planner can give you good advice, but you have to seek them out.