ROTH IRA Or 401-K?

Dave explains to Greg why investing in a Roth IRA is better than a traditional 401k.

QUESTION: Greg is 24 and has been putting 15% in his employer’s 401k.  Should he be investing in a Roth IRA instead?

ANSWER: When you retire, you’re required to start systematically cashing out your retirement when you’re 70 years old.  If you continue saving as you are now, you’ll be in a higher tax bracket when you retire than you are right now.  For this reason, I would save in the Roth IRA first.

Given the same amount going in, the Roth – fully funded at $3,000 a year – from age 25 to 65 will yield $3 million.  If you put the exact same amount into your 401k at work, you’ll be taxed as you pull money out.  The Roth is tax-free.

Start with the Roth IRA. Then if you want to do more than $250 a month into retirement, put some into your 401k.