Answered: 401(k) vs. Roth IRA? Use Both If You Can

PHOTO: Beige Renegade

Which is best for me: A 401(k) or an IRA? If you’re asking yourself this question, then, you, my friend, are on the right track to saving for retirement. It’s okay to admit that 401(k)s and IRAs are confusing (they are confusing AF).

But, that’s not a good excuse not to save. Let’s get into it.

Where does one begin? During the investment process, certain questions are bound to pop up: Do I need a Roth IRA if I have a 401(k)? Which retirement account is best for me? And what funds should I invest in, anyway?  

For some answers on 401Ks, as well as IRAs, keep reading.

Should I contribute to my employer’s  401(k)?

Yes. Without a doubt: yes!

If your employer offers a retirement plan, like a 401(k) or 403(b), and will match a percentage of your contributions, and you’re not taking advantage of it, you’re essentially leaving money on the table that could make a big difference in a few decades because of compound growth.

After all, it’s free money for you.

Plus you’ll have a tax-deferred account that makes saving a cinch through automatic payroll deduction. The next stop for saving for retirement is an Individual Retirement Account — aka, an IRA.

What is an IRA and How Many Types of IRAs are There?

IRAs comes in three ways: There’s the traditional IRA, a Roth IRA (which comes with income limits), and — if you’re self-employed — you may want to open a Simplified Employee Pension IRA (SEP-IRA).

It sounds confusing, but the basic rule with IRAs is you’re going to pay the US government taxes at some point. The question is when. With a traditional IRA, the government postpones your taxes. You contribute pre-tax earnings, reduce your tax liability for the year, and watch that money grow on a tax-deferred basis year over year. You don’t pay the piper until you withdraw your money in retirement.

What Is a Roth IRA?

This particular type of retirement account was introduced in 1997 and created in Congress to allow individuals to save for retirement. Contributions to a Roth IRA are made with after-tax funds, and the assets grow tax-free. Unlike a Traditional IRA, withdrawals from a Roth IRA are usually tax-free. This is especially beneficial if you expect to accrue a significant amount of interest on your earnings over time, according to MyDomaine.

A Roth IRA is not offered through your employer, so you’ll have to set this account up yourself. The process of setting up an IRA with Ellevest is super simple. It’s all online: You can start your IRA within minutes, see (and adjust, if you want) your recommended Ellevest IRA portfolio, and then…just sign off on it and relax.

Who Can Get a Roth IRA?

While anyone can contribute to a Traditional IRA, eligibility for a Roth IRA is based on your income level. Pretty much anyone who has earned income is eligible for a Roth, as long as they don’t earn more than $131,000 if they’re filing individually or $193,000 if they’re filing jointly. If your employer offers you a 401(k), you can diversify and set up a Roth IRA in addition to that.

That’s great news, especially if you’re a freelancer, or work at a place without a 401(k) plan. Once you open an IRA, it stays in the same place, even when you switch jobs; it’s not housed with your employer. Pretty cool, right?

A nice bonus here: You can contribute up to $5500 a year (once you hit 50, you can invest an extra $1000 annually).

Eligible for Both? Get Both.

Contrary to what a lot of people think, you don’t necessarily have to think IRA versus 401(k). You can save with both as long as you’re qualified and meet contribution and income limits.

How Can I Set Up an IRA?

You can open an IRA at Ellevest, or at another financial services provider. Whether you go with a Traditional or Roth account, the bottom line is an IRA lets you add thousands of dollars a year to your retirement savings. In 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 ($6,500 if you’re age 50 or older).

Have multiple 401(k)’s and/or IRA’s? Not a problem. You can consolidate your multiple retirement accounts into one simple view with Ellevest digital. And the process of transferring your IRA to Ellevest is super easy. It’s all online: You can start your IRA transfer within minutes, see (and adjust, if you want) your recommended Ellevest IRA portfolio, and then…just sign off on it and relax.

Ellevest will reach out to your IRA provider to take care of the rest, and if they need additional information from you, they’ll get in touch. Also important: They won’t charge you any fees for bringing your IRA over to Ellevest, and you won’t be taxed for the IRA transfer either.

Why You Should Invest Like a Woman

Whether you’re sipping pína coladas in Hawaii or relaxing in the desert, you know you want to retire in style. And you deserve a retirement account designed to help you do just that.

That’s why our friends over at Ellevest have flipped retirement planning on its head, bringing you a totally different IRA — one that’s specifically built for women.

Wait, what?

Yes, for women — but not in the pink vs blue. There are gender-specific differences that impact our ability as women to save and what we’ll need to do to make our retirement the best long weekend ever. Some other financial advisors don’t recognize these differences, and your IRA might reflect that.

I mean… we’ve heard it all before. Men are from Mars; women are from Venus. A lot of these “differences” between genders are bull, but some gender-based differences do have a real impact when you’re planning for retirement. For instance, the fact that women, on average, outlive men, so our money needs to last for a longer retirement than men’s. Also, our salaries grow at different rates, so we need to be smarter about how much we save and when we do it.

So, as we said: We’re kind of over basic. If you are, too, you can transfer your traditional, Roth and SEP IRA(s) to Ellevest to get the personalized portfolio your bad-a$$ retirement deserves.

Ok, So What’s The Takeaway?

The takeaway here is a Roth IRA is a unique type of retirement account that (if you’re eligible) you should absolutely consider using in conjunction with your 401(k), or alone if you happen to be your own boss or self-employed. The salary requirements to be eligible a fairly easy to meet.
PHOTO: Ellevest

Next up: are you self-employed? You have retirement options too.

Disclosures: We’re excited to be partnering with Ellevest to start this conversation about women and money. We may receive compensation if you become an Ellevest client.