The Superior Retirement Account
What is the best type of retirement account to take advantage of?
Let's start with the 401 K plan. If a 401 K plan has a match, always invest up to the match in order to take advantage of free money. Beyond that match, you might want to keep your options open for your retirement dollars.
What if you have a 401 K plan without a match or no plan at all?
Consider a Roth IRA as a solid retirement account. I don't think that the Roth IRA gets the credit it deserves. Here is why I think it is the superior retirement account
In a traditional IRA, the money you contribute each year is deducted from your income as a tax benefit. The money in the IRA grows without any tax consequences until you take it out of the account. It is at that time you pay taxes on the money.
A Roth works differently. You don't get the tax deduction upfront. You get the tax break when you take the money out of the account. You get the money from the Roth tax-free. Let's say that you accumulate $1,000,000, and you retire. Would you rather pay the taxes on the income or get it tax-free? This one aspect of the Roth I think makes it superior to the IRA.
A built-In Emergency Account
All of the money you contribute to the Roth can be taken out without penalty. You don't want to think of retirement accounts as emergency accounts. However, as a last resort, you do have the contributions available to you without penalty.
You can contribute to both a 401 k plan and a Roth at the Same Time.
An IRA is pretty restrictive if you put money into a 401 K plan. Your eligibility to put money in a Roth is not affected because you invest in a 401 K plan. Your eligibility is affected by how much money you make. If your modified adjusted gross income is less than $198,000, you are free to put the full amount into the plan. Once you cross $198,000 MAGI, your ability to contribute starts to be limited up to $205,999. Once you cross that $205,999, you are not eligible to contribute to a Roth.
Finally, you are not required to take money out of the account at a certain age.
With an IRA, the IRS says you have to start taking out required minimum distributions at age 72. That doesn't apply to a Roth.
Bottom Line – It is easy to just default to the IRA or the 401 K plan because it is "what you are supposed to do." Consider the Roth instead of doing what everyone else is doing.