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Roth IRA Vs 401K: Investments, Contributions And Mutual Fund Growth
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Published: May 18, 2007
For the young professional, a Roth IRA is an intelligent investment option when considering those far off years of retirement. This post-tax plan was created specifically for the lower and middle classes, and rightfully so in a time when pensions are becoming slashed and social security quickly disappears down the drain.
To ensure a financially stable retirement, investors should consider having a diverse portfolio of both pre-tax (401k) and after-tax (Roth IRA) programs. This diversification of investments will provide retirees financial stability and a decreased tax rate allowing for increased enjoyment and less worries in the later days of life.
A single person, who makes less than $95,000 or a married couple who make less than $160,000 annually, can contribute as much as $4,000 annually to a Roth IRA. If a 25 year-old invests the maximum alloted amount into Roth IRA for forty years, at an average 8% annual interest rate, they will accumulated $1.1 million. That $1.1 million is non-taxable, considering the original $4K was taxed before even being invested. Though $1.1 million is far from enough money to solely retire on, when coupled with a 401k plan, these two investments provide a healthy nest egg.
This brings us to the importance of putting money into a 401k. Some employer contributions will match as much as 100% of every dollar that you put into your 401k. This means doubling your retirement money potential. With a matching percentage of that degree, it would be foolish for an investor not to put in the maximum allowed amount into their 401k, even though the 100% contribution rate is a rarity.
With that said, it must be noted that there are both positive and negative aspects to the 401k plan. The monies a person invests into a 401k plan come from pre-tax dollars. This means that before a paycheck is taxed, money is automatically removed from the gross sum of a monthly salary, lowering the yearly taxable income. However, when a person finally decides to retire, the money that they receive from their pension is taxable. If a person's pension allots them $100,000 per year, they will more than likely see only $75,000 of their money. This is why having diversified investments of both Roth IRA and a 401k plan help increase mutual fund growth.
There are bonuses to enrolling in a Roth IRA. At anytime a person wishes, they can remove their contributions from the fund without penalties and tax free. It should be noted that the word ‘contributions' is in italics, contributions are different than earnings. Earnings may not be taken out, only the amount contributed to the Roth IRA. If a person wishes to withdraw their earnings before the age of 59, a 10% penalty fee will apply to the total amount withdrawn, which can seriously dip into available funds. Fortunately, there are two circumstances which allow an investor to remove both contributions and earnings from a Roth IRA without suffering penalty charges. These two exceptions are: buying a first home and college tuition.
Once a person has had a Roth IRA plan instated for at least five years, the IRS will allow penalty free access of $10,000 per person, towards a first home. Thus a married couple has the financial ability of $20,000 when attempting to invest in their first piece of property. If a person removes money from the Roth IRA before the five year bench mark, the 10% early withdrawal penalty will not occur, but the money that is removed will be treated as taxable income. When dipping into a Roth IRA for your children's college tuition, the same principle applies of no 10% early withdrawal penalty, but the money removed is viewed by the IRS as taxable income.
When planning for retirement, it is important to consider diversification of investments by contributing savings to both pre and post tax retirement plans. A Roth IRA is a safe choice for a post-tax retirement plan, especially when monies are simultaneously being contributed to a 401k plan, escalating one's potential for mutual fund growth. The Roth IRA is aimed at helping the lower and middle classes ensure their financial securities for the future to help in the shady days of aging when the pension received from a 401k plan is simply not enough to pay all of the bills.
Sources:
Burt, Erin. "Why you need a Roth IRA—Now!." Kiplingers Personal Finance. 17 March 2006. MSN Money. 15 May 2007. http://moneycentral.msn.com/content/Savinganddebt/ Savemoney/P147209.asp.
What You Should Know About Mutual Funds. William Francis Galvin Secretary of the Commonwealth of Massachusetts. 15 May 2007. http://www.sec.state.ma.us/sct/sctprs/prsamf/amfid x.htm
Hamilton, Martha M. "Roth IRAs Save Dessert for Last." Washington Post. 31 Dec. 2006. 15 May 2007. http://www.washingtonpost.com/wp-dyn/content/artic le/2006/12/30/AR2006123000083.html.
A single person, who makes less than $95,000 or a married couple who make less than $160,000 annually, can contribute as much as $4,000 annually to a Roth IRA. If a 25 year-old invests the maximum alloted amount into Roth IRA for forty years, at an average 8% annual interest rate, they will accumulated $1.1 million. That $1.1 million is non-taxable, considering the original $4K was taxed before even being invested. Though $1.1 million is far from enough money to solely retire on, when coupled with a 401k plan, these two investments provide a healthy nest egg.
This brings us to the importance of putting money into a 401k. Some employer contributions will match as much as 100% of every dollar that you put into your 401k. This means doubling your retirement money potential. With a matching percentage of that degree, it would be foolish for an investor not to put in the maximum allowed amount into their 401k, even though the 100% contribution rate is a rarity.
With that said, it must be noted that there are both positive and negative aspects to the 401k plan. The monies a person invests into a 401k plan come from pre-tax dollars. This means that before a paycheck is taxed, money is automatically removed from the gross sum of a monthly salary, lowering the yearly taxable income. However, when a person finally decides to retire, the money that they receive from their pension is taxable. If a person's pension allots them $100,000 per year, they will more than likely see only $75,000 of their money. This is why having diversified investments of both Roth IRA and a 401k plan help increase mutual fund growth.
There are bonuses to enrolling in a Roth IRA. At anytime a person wishes, they can remove their contributions from the fund without penalties and tax free. It should be noted that the word ‘contributions' is in italics, contributions are different than earnings. Earnings may not be taken out, only the amount contributed to the Roth IRA. If a person wishes to withdraw their earnings before the age of 59, a 10% penalty fee will apply to the total amount withdrawn, which can seriously dip into available funds. Fortunately, there are two circumstances which allow an investor to remove both contributions and earnings from a Roth IRA without suffering penalty charges. These two exceptions are: buying a first home and college tuition.
Once a person has had a Roth IRA plan instated for at least five years, the IRS will allow penalty free access of $10,000 per person, towards a first home. Thus a married couple has the financial ability of $20,000 when attempting to invest in their first piece of property. If a person removes money from the Roth IRA before the five year bench mark, the 10% early withdrawal penalty will not occur, but the money that is removed will be treated as taxable income. When dipping into a Roth IRA for your children's college tuition, the same principle applies of no 10% early withdrawal penalty, but the money removed is viewed by the IRS as taxable income.
When planning for retirement, it is important to consider diversification of investments by contributing savings to both pre and post tax retirement plans. A Roth IRA is a safe choice for a post-tax retirement plan, especially when monies are simultaneously being contributed to a 401k plan, escalating one's potential for mutual fund growth. The Roth IRA is aimed at helping the lower and middle classes ensure their financial securities for the future to help in the shady days of aging when the pension received from a 401k plan is simply not enough to pay all of the bills.
Sources:
Burt, Erin. "Why you need a Roth IRA—Now!." Kiplingers Personal Finance. 17 March 2006. MSN Money. 15 May 2007. http://moneycentral.msn.com/content/Savinganddebt/ Savemoney/P147209.asp.
What You Should Know About Mutual Funds. William Francis Galvin Secretary of the Commonwealth of Massachusetts. 15 May 2007. http://www.sec.state.ma.us/sct/sctprs/prsamf/amfid x.htm
Hamilton, Martha M. "Roth IRAs Save Dessert for Last." Washington Post. 31 Dec. 2006. 15 May 2007. http://www.washingtonpost.com/wp-dyn/content/artic le/2006/12/30/AR2006123000083.html.
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