401(k) Vesting vs Roth IRA: Which Should You Prioritize?
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When it comes to retirement planning, many individuals have several options to choose from. Two common choices are the 401(k) and Roth IRA. While both offer great benefits, there are important differences between them that could affect your decision. In this article, we’ll take a closer look at 401(k) vesting vs Roth IRA and help you determine which one you should prioritize.
What is 401(k) vesting?
A 401(k) is an employer-sponsored retirement plan that allows employees to contribute a certain percentage of their paycheck. Employers may also contribute funds that match the employee’s contributions or make additional contributions on their behalf. Vesting refers to the amount of time an employee must work for an employer before the employer’s contributions become the employee’s money. Employers may use one of two different vesting schedules: graduated or cliff.
Graduated vesting means that an employee earns a certain percentage of employer contributions for each year of employment. For example, if an employer has a graduated vesting schedule that vests 20% per year, an employee who worked for two years would be 40% vested. On the other hand, cliff vesting means that an employee must work for a certain number of years before any employer contributions become the employee’s. This means that if an employee leaves the company before reaching the cliff period, they forfeit all employer contributions.
What is a Roth IRA?
A Roth IRA is a retirement savings account that allows individuals to contribute after-tax dollars. The account grows tax-free and qualified withdrawals can be taken tax-free after reaching age 59 1/2. Roth IRAs also offer a high degree of flexibility when compared to 401(k)s. Withdrawals of principal contributions can be made at any time for any reason without penalty, and the account owner does not need to take required minimum distributions (RMDs) in retirement.
Should You Prioritize Your 401(k) Vesting or Roth IRA?
When deciding between 401(k) vesting vs Roth IRA, it is important to consider your individual circumstances, preferences, and financial goals.
If your employer offers a 401(k) plan with employer contributions, it is usually a good idea to participate in the plan and aim to become fully vested to take full advantage of the employer match. The catch-up contribution options for employees aged 50 and above make the 401(k) plan an especially valuable option for those closer to retirement. However, if your employer’s vesting schedule is such that you don’t expect to become fully vested before leaving the company, a Roth IRA might be a better option for retirement savings.
Roth IRAs have minimum distribution requirements, but not until age 72, and are not impacted by 401(k) vesting periods. If you are in a low tax bracket now or don’t anticipate being in a lower tax bracket in retirement, a Roth IRA may be a better choice. You can also make contributions after reaching age 70 ½, while 401(k) contributions must stop at that age. Additionally, Roth IRAs have more flexible withdrawal rules, making them ideal for people who want to maintain some liquidity in their retirement savings.
Conclusion
While 401(k) vesting and Roth IRA both have their own advantages and disadvantages, there is no right or wrong choice for everyone. Prioritizing one option over the other depends on individual circumstances and financial goals. Take time to assess your own priorities, income, tax bracket, and retirement plans to determine the best choice for you. It may even be beneficial to speak with a financial professional to guide your decision and help you create an effective retirement strategy.
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I started with just getting the match with 401k. 2 years ago I started listening to these guys and jumped into the deep end. Opened up 2 Roth IRA accounts, switched over to Roth 401K and now max all 3 accounts each year. If you project being in a higher tax bracket at retirement and can tolerate the additional taxes, it is a empowering feeling to know this is all growing tax free! Opened up a brokerage account at the same time and havent looked back. Everything is on auto pilot for the 20+ more years until I hit retirement.
Do all 3 if you can and load up.
I walked away from investing in Texas because of the high property taxes. Almost as bad HOA fees. The property tax outlook is so dire in Texas that at some point people will flee to other states.
Two and six years doesn’t seem that long, actually.
I put 25% into my 401k and I'm 29 should that be enough to retire by 65? I put about $15-20k in each year.
I didn't start investing in the 403b program until they started matching after the first year. I considered the participation fee.
Nice…. i am also interested
Is Roth IRA with credit Union a smart way to go
I am 40 years old and I rolled a traditional 401K to my current employer. I am now contributing to a Roth 401K. Would it make sense for me to open a Roth IRA , to go ahead and satisfy the five year rule? even though I do not plan to retire until I am 70? Thanks. Just for some context. My traditional 401k is worth $2000,000.00 and my Roth 401K is worth $13,000.00.
I worked for a big company that offered full vesting at 3 years. At 2.5 years there (and I had no intention of leaving) I got an unexpected job offer to return to a previous company to head up a brand new department. It was fully remote (the job I left was in the downtown city center) and offered many quality of life benefits compared to the big company job. So, as much as it killed me to leave all that "free money" behind with only 6 months to go, I had to do it. I don't regret it, but I do wish the timing had been a little different.
I would add that you should look at the quality of the 401k plan itself. If the offerings are expensive and don’t offer services that align with your investment goals then that could be a valid reason to reallocate contributions away from your 401k. They’d have to be pretty bad to sway the math though.
My employer doesn’t have a match, so should I prioritize maxing out my Roth IRA first or the 401k (traditional)?
As always thanks for the content.
Yes even 20% vested is a great deal, always get that 401k match.