Understanding How a ROTH IRA Works
In many respects, a ROTH IRA works opposite of how a 401(k) works. In a ROTH IRA, your contribution is after taxes. The ROTH IRA will not reduce your current income tax obligation. But when you take money out of your ROTH IRA, you do not pay income taxes.
There are caps on how much you can invest in a ROTH IRA. Like 401(k) plans, you have a variety of options for investing your ROTH IRA. You can max out your contribution limits for both the ROTH and 401(k) plans.
Employers are less likely to match funds for ROTH IRA’s. Basically the ROTH IRA has similar requirements on withdrawal of funds as the 401(k). You cannot borrow from your ROTH IRA funds.
How do you decide on allocate funds between a 401(k) and a ROTH IRA? One strategy is outlined below
- Max out your employer’s contributions to your retirement. Generally this will be into a 401(k) plan.
- If you have additional funds you can invest, put as much money into a ROTH IRA as you have available.
- If you have additional funds available after maxing out the ROTH IRA. Place the remaining funds into your 401(k) plan.
You will probably need to arrange for your ROTH IRA on your own. Banks and local financial management organizations can provide you with a variety of investment options..