How to Retire in Style: 401k vs. Roth IRA

Let’s keep it simple to get you started on investing specifically for retirement.

401k

401k is a retirement account specifically created by your employer, where you can contribute a portion of your paycheck to. Most companies offer 401k matching, which means that they can match your contributions. 

If you are working a full time job, you DEFINITELY should take advantage of this, and contribute the maximum match if possible. For example, if a company is offering a 5% 401k match, then you should contribute at least 5% of your paycheck to your 401k. This is guaranteed free money for retirement.

Roth IRA

Roth IRA is a retirement account that you can create on your own, where it is not related to your company. You can contribute up to $6,000 every year to this account (if you make less than $125,000 a year.) Once you’re 59 1/2 , you can start taking stock profits out of your Roth IRA.

Why is a Roth IRA so good? It’s so good because all your profits you get from stocks IS NOT TAXED by the government. This is basically free gains. Your regular stocks (like your Robinhood account) will get taxed on any profits made by stocks. 

How to Start a Roth IRA

1. Open up a Roth IRA account via a brokerage, such as Charles Schwab or Fidelity.

2. Transfer money from your bank account to your Roth IRA Account. As a reminder, you can contribute up to $6,000 annually to your ROTH IRA.

3. After the money transfer has been completed, go ahead and buy individual stocks, etfs or mutual funds with the deposited funds. Popular, safer options can include VOO, SWPPX or an S&P 500 based mutual fund. You can also purchase blue chip, popular stocks such as Apple, Microsoft or Google.

4. Watch your money grow, and continue contributing annually to your ROTH IRA.

5. If you need to take out any contributions, you are able to do so. However, once you are 59 ½ then all those contributions AND profits are yours, tax free.

Roth IRA Tips

• You can withdraw your contributions AT ANY TIME without any fees or penalties.

  • You CANNOT withdraw any PROFITS however until 59 ½

  • Example: If you put in $1000 into Apple, and it grows to $1500; you can always take out the $1000 anytime. You can take out the remaining $500 once you’re 59 ½ tax free!

• You have to CHOOSE which stocks to invest into your Roth IRA after you deposited your $6,000. Some investors forget that you have to pick a stock. It’s not automatically chosen for you.

  • And yes, you can contribute less than $6,000 a year.