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To get the most out of your retirement savings, you should max out both your 401K and Roth IRA. The question is, which should you max out first?
If your employer provides a matching 401K program, you’ll want to max this out first. If your employer does not offer a matching 401K program, you’ll want to contribute to your Roth IRA first.
Here’s a quick breakdown of the why this is the case.
Differences Between 401K And Roth IRA
The main difference between a Roth IRA and a 401K is when taxes are deducted. With a Roth IRA, taxes are deducted before the money is deposited.
With a 401K, the money that you contribute doesn’t get taxed until you withdraw during retirement.
01Ks and Roth IRAs have different maximum contribution amounts. For investors under the age of 50, the federal government allows individuals to contribute up to $18,500 a year into a 401K. For a Roth IRA, the annual limit for this age range is $5,500.
How To Invest When Your Employer Offers A Matching 401K Program
When your employer offers a matching 401K program, you should invest the maximum amount that they match. For example, if they match up to 4% of your income, you should invest at least 4%.
It’s free money. You should take full advantage of it! Once that’s maxed out, you should focus on contributing to your Roth IRA.
How To Invest When Your Employer Does Not Offer A Matching 401K
When your employer doesn’t offer a matching 401K program, prioritize your Roth IRA first. Your money will be taxed before you contribute it. But, if you plan on being even more financially successful later in life, that’s a good thing. You’d rather pay the taxes now while you’re in a lower income bracket. Roth IRAs also give you more freedom to choose which companies will be included in your investment portfolio.
That’s the gist of how to get the most out of your 401K and Roth IRA. First, take advantage of a matching 401K program if you have access to one. If not, prioritize your Roth IRA.