Could a Roth IRA be Better Than a 401(k)?

Very few people whom I know are familiar with the benefits of the Roth IRA. It was named for the late Senator William Roth of Rhode Island, who proposed it. It is similar to a traditional IRA except contributions are never tax-deductible. Contributions to traditional IRAs are sometimes deductible or partially deductible, depending on your income and whether or not you have a retirement plan like a 401(k) at work. With Roth IRAs, individuals are limited to incomes of $95,000 ($150,000 for couples) to be eligible for full contribution amounts.

However, unlike the traditional IRA, you can withdraw your contributions from a Roth IRA at any time, at any age without penalty. Earnings are not taxed if you wait until at least age 59 1/2 to begin withdrawing them and have held your Roth IRA for at least five years. With a Roth IRA, the contributions are taxed without any deferment, but they grow tax-free and the gains are never taxed (see above). With a 401(k), contributions are tax-deferred, but eventually the contributions and gains will be taxed. By the time most people retire, the earnings from their retirement accounts will far exceed their contributions, due to compounding. With that in mind, one could make the case for a Roth IRA possibly being better than a 401(k).

Here's an illustration. Let's suppose that over the course of 25 years you contributed a total of $75,000 to your 401(k) and your employer kicked in $30,000 during that same period for a total of $105,000. By the end of those 25 years, your compounded gains (assuming you're getting a decent rate of return) could total $500,000. When you retire, you will eventually pay taxes on the entire $605,000 as well as the gains you receive from it after retirement. Now, let's assume that, instead of contributing to your 401(k) for those 25 years, you contributed only $50,000 to your Roth IRA (without a matching contribution from your employer, of course). The assumption is also that you would not be able to contribute as much because you are using post-tax dollars for the Roth IRA vs. pre-tax dollars for the 401(k). However, because you generally have more investment options with the Roth IRA money than with the 401(k) money, you are likely to find a better rate of return. With that in mind, let's say your compounded gains could total $400,000. When you retire, you could have the entire $450,000 as well as the gains you could receive from it post-retirement, completely tax free!

As you can see, it is possible that many people could come out better putting at least a portion of their retirement funds into a Roth IRA. Judge for yourself. I actually contribute more to my Roth IRA than I do to my 401(k). I put just enough into my 401(k) to get my employer's maximum matching contribution, and that's all. However, I'm not a financial advisor and I don't play one on TV, so check with your financial advisor to see what would be right for you. For more information about the Roth IRA, see the following link: http://www.rothira.com.

Terry Mitchell is a software engineer, freelance writer, and trivia buff from Hopewell, VA. He also serves as a political columnist for American Daily and operates his own website - http://www.commenterry.com - on which he posts commentaries on various subjects such as politics, technology, religion, health and well-being, personal finance, and sports. His commentaries offer a unique point of view that is not often found in mainstream media.

Financial Intelligence - Compounding (The Ninth Wonder of the World)

Compounding: The Ninth Wonder of the WorldBy Nicola Cairncross Compounding is often described as the... Read More

Business Ownership, Cash in Your Pocket - Today!

Yesterday we learned that 74% of all wealth is created by people who own their... Read More

From Debt to Financial Freedom

The vast majority of working people are in debt. The vast majority of people who... Read More

Russ Whitney - Building Wealth Through Real Estate

When Building Wealth by Russ Whitney was released a few years ago it sent shockwaves... Read More

3 Simple Ways to Generate Cash Flow

This article focuses on generating cash as a full time job or "on the side"... Read More

A Completely New Way To Get Rich Rapidly

This new way is catching on around the world. People are compounding money rapidly for... Read More

The TRAP Behind Websites With INSTANT Searches for Unclaimed Money

There is no questioning that the amount of unclaimed money or property being held by... Read More

Steps to Financial Freedom

Financial freedom is the power to do what you will with your life without being... Read More

Principles to Ensure a Fantastic Financial Finish

Most people want to get to the end of their lives and be able to... Read More

Saving Money - 35 Pieces of Advice to Save

There are only 2 ways to grow your wealth - Increase your income (by earning... Read More

A College Degree or an MBA is NOT NEEDED to be Financially Free

Look at Forbes' top 10 United States wealthiest people. Notice the top five "self made"... Read More

Who Wants To be A Millionaire?

How many people search Google, Yahoo and MSN each day for the terms - make... Read More

Build Wealth - Formula To Success

A mole travels one road, according to the way nature intended him; and a squirrel... Read More

Online Retirement Opportunity: Freelance Copywriting

For most of us, the idea of retiring simply on our pension is not a... Read More

Super-charge Your Dream of Retiring Rich with the Roth 401K!

This retirement account is so new and unique that you may not have heard of... Read More

Why Get Rich When You Can Be Wealthy?

"Any fool can rich, the wise get wealthy." Chris WidenerGetting rich is the main goal... Read More

How Much Do You Need To Earn Per Hour To Achieve Your Yearly Financial Goals

Have you ever asked yourself what your highest income producing activity is?If you're like most... Read More

My Entrepreneurial Fire-I Grabbed My First Million Before I Got Too Old

My First Million took me exactly 27 months to achieve. I remember the day I... Read More

Easy Ways to Save $1,000

Vacation season is upon us and it can be tempting to pull out the plastic.... Read More

5 Easy Ways to Save and Build Wealth

1. Pay off high-cost debt. The best investment most borrowers can make is to pay... Read More

WARNING: The Biggest Lie About Compound Interest

Have you wondered why financial experts only tell you certain things about building wealth? Do... Read More

The Three Step Plan To Prosperity

You have $100 in your bank account, your rent is past due, your creditors are... Read More

Warren Buffet: Wisdom from the Worlds Richest Investor

In light of the dominant mindset overshadowing the market these days, a breath of fresh... Read More

10 Ways To Find The Money Hiding In Your Paycheck

No matter how tight things are financially for you; no matter how bleak you think... Read More

21 Secrets of Self Made Millionaires

Self-Made Millionaires are not smarter or better than you. They have just discovered these secrets... Read More

Re-discovering the Fundamentals of Financial Planning

To lose weight in the 80's, we went on low-calorie diets. In the 90's, we... Read More

Personal Budget Programs

Do you have financial problems? Then a budget is the answer if you are tired... Read More

The Parthenon Principle

Have you seen a picture of the Parthenon in Athens, Greece? I will never forget... Read More

Learn How to Bank Like a Banker

The business of banking has changed dramatically over the last decade. Because the cost of... Read More

How Should I Create Passive Income?

If you're wondering where to create passive income, then you are likely not alone. There... Read More

8 Tips for Keeping More of Your Hard Earned Money

Masters degree not required...just a little common sense, a $5.00 calculator and a realistic plan... Read More

What Do You Mean By Diversity?

The word 'diversity' is a unique one. It can represent many things, depending upon its... Read More

The Top 10 Steps to Extraordinary Personal Wealth

I recently came across startling figures about the average American's finances. Only 4% of us... Read More

10 Wisdom-Based Wealth-Building Strategies

"It's the business of your life?and you're the CEO!" Gala GormanImagine that you're Noah and... Read More

Starting With Smaller Goals First And Work Your Way Up Until You Achieve Financial Freedom

While you need to have a lot of positive-thought and confidence in order to be... Read More

The Old Monied Dupont Nemours and Roosevelt Families Buy a Tax Haven

This 4,000 acre sale (now a marina and resort town - with an airport for... Read More

The Secret Barrier To Wealth - Underearning

Is the ghost of "Money Past" haunting you? Do you feel like no matter what... Read More

How To Be the Ultimate American Consumer

Feel like a lemming lately? Ready to follow the crowd into the great plunge of... Read More

Before There Was Wall Street, There Was Gold.. & when Wall Street is gone, there will still be Gold

Paper burns and large companies can go bankrupt, but if you want a piece of... Read More

Methods Of Raising Instant Cash

The inability to come up with the necessary cash when suddenly presented with a "can't... Read More

The Secrets of World Money Flows and A Simple Way to Understand Them

You can learn the secrets of world monetary flow if you will simplify the concept.... Read More

Why You Need To Buy and Sell Gold Coins (Part 4)

Top Investment PerformanceThroughout history, many coin collections have produced substantial long-term profits for their owners.... Read More

Spiritual and Emotional Money Goals: The Keys to a Financially Free Future

Are you setting the right money goals?Most people believe having more money would mean having... Read More

Top 7 Lucrative Paper Businesses You Can Run

Why not run a lucrative paper business? Paper businesses do not require large investments of... Read More

Offshore Strategies & Services

Offshore strategies may or may not be right for you. Moreover, there is a right... Read More

Turn Your Job Loss Into the Opportunity of a Lifetime

There are few things in life that are more stressful than the loss of a... Read More

What is Your Creative Retirement Plan?

The idle are a peculiar kind of dead that cannot be buried." Oriental proverbOne thing... Read More

Residual Income - The Myth

"Join our program and retire in 3 months..." yeah, right.We all want to get to... Read More

Pay Yourself First - If the Only Thing You Did Was This, Youd be Rich

Bottom line. No exaggeration. No hype. If you want to be rich, all you have... Read More

7 Power Habits that Build Financial Independence

Financial independence is having the freedom to support yourself through your own efforts. Here are... Read More