Post # 1
I am currenlty contributing to both a 401K (3% employer matched) and a Roth IRA account. From a yearly standpoint, I put in around 4x more in my 401K than I do in my Roth IRA.
I am looking to increase one of these accounts by about $400 a month, and I dont know which would be a better investment in the long run. Do these types of accounts usually see similar returns? I am really confused…
Post # 2
Their rate of return depends on what the money is invested in, not the type of account it is. So, it doesn’t matter which you contribute to from a return perspective. However, the 401(k) is matched by your employer, which means you not only get whatever the rate of return is, you also get free money from your employer AND you get to deduct the amount of your contributions from your income when you file taxes, so you’ll be paying taxes on less money. From that perspective, the 401(k) is better than Roth,
On the other hand, Roth is money you’ve already paid taxes on, so you won’t have to pay taxes when you withdraw that money nor will you pay taxes on what your account has earned, like you do with the 401(k). But since you won’t be taking money out of your 401(k) until you are retired when you will have less income, theoretically, you’ll be in a lower tax bracket so the tax hit won’t be that much.
Post # 3
What the PP said.
Most people I know contribute to their 401k up to the employers match. Then they max out their Roth IRA (you can only contribute $5,500/year) and then if they want to save more they put more towards their 401k.
Post # 4
I agree with ^^^ – I’ve always heard to max out your Roth first and then contribute more to 401k after that.
Edit: Definitely match the 3% first. That’s just free money. I assume you’re already doing that though?
Post # 5
Roth and 401K is a legal designation of the account and has nothing to do with where the money is invested. You’d have to look into what the money was being invested in and look at the projected return on that. But if your employer is matching the 401k then it is almost certainly a better deal. There are also differences in tax treatment for a Roth IRA than a traditional or a 401K so depending on your particular situation that might make a difference as well.
Post # 6
There are a lot of good resources online addressing this topic. A lot of it depends on how you want to be taxed- now or years down the road when you withdraw the money. I’ve heard that you should contribute up to your employer match in the 401(k) and then contribute up to the maximum in your Roth. Be sure to also set aside some in an emergency savings fund that you can access anytime as well (if you haven’t already).
Post # 7
Really depends on your finances and tax situation.
Post # 8
are you already receiving the max amount you can from your employer? If not, I would increase your 401k contribution until you reach that.
The Roth has a max contribution of $5500 per year so that extra $400/month will be close to the max. Depending what you’re already contributing, you might not even be able to fully dedicate that to your Roth.
DH and I maxed out our employer matches first, maxed out our Roth’s and now we increase our 401k every time we get a raise. Hoping to max those out every year soon.