There are two main options in retirement accounts: Roth IRA and 401(k). Both types of accounts allow you to contribute funds after taxes, meaning you pay taxes up front when depositing money rather than later when you're withdrawing funds. However, despite their similarities, these accounts also have different perks and drawbacks, depending on your financial situation and retirement plan. Here are a few key differences between these types of retirement accounts.
1. Contribution amounts
If you have a lot of disposable income, a 401(k) might be more appealing to you. The ceiling on yearly contributions to a 401(k) is higher than a Roth IRA. Employees can contribute up to $16,500 per year, but the cap is set at $22,000 for workers over 50. In contrast, a Roth IRA only allows $5,500 per year and that amount increases to $6,500 at age 50. So if you earn more and would like to contribute more of it to your retirement, a 401(k) might be a better option for your financial situation.
A benefit of a Roth IRA is that you never have to withdraw or receive distributions from the account. It can exist, basically forever, without any required distributions. However, a Roth 401(k) will require distributions starting at age 70 and a half. Most of the time, the account holder is likely retired by that point and needs the money anyway. If you don't want to withdraw, you can probably convert your 401(k) into an IRA or transfer the funds to a new account. If you plan to be retired by then, a 401(k) might work well for you. If not, maybe you should consider a Roth IRA instead.
3. Match amounts
A benefit of a 401(k) is that an employer as the opportunity to match workers' contributions up to a certain percentage. This is basically free money. The match portion would be treated just like any other 401(k) contribution because it goes in pretax. Meaning, taxes will have to be paid on the money when it's time to distribute it. So you can't have employer matching contributions on a Roth 401(k). A Roth IRA doesn't have this perk for the same reason. The employer's money can't be put in after tax. However, nowadays, you'll be hard pressed to find an employer that does match amounts so this perk only applies in a few instances.
4. Income limits
Roth IRA accounts prevent contributions once you earn more than $176,000 in modified adjusted gross income for married couples. If you're single, the limit starts at $120,000. However, a Roth 401(k) has none of these restrictions. You can continue to contribute to your account regardless of your yearly income. If you're a high wage earner, a Roth IRA might not even ever be an option for you.
5. Borrowing against your account
With Roth 401(k), you can borrow up to 50 percent of the account balance or $50,000 — whichever is smaller. However, if the loan isn't paid back by the terms of the agreement when it comes time to take out the money, it could be considered a taxable distribution if you're under 59 and a half years old. This option isn't available with a Roth IRA, but there are some work arounds if you really want to take loan out against your balance.
**5) Borrowing against your account**
- 5 Differences Between A Roth IRA And A Roth 401k ›
- Roth IRA vs 401k? You May Not Have to Choose - The Simple Dollar ›
- IRA vs. 401(k): Where Should You Invest Your Money? - NerdWallet ›
- Roth IRA or Traditional IRA or 401k - Fidelity ›
- Comparison of 401(k) and IRA accounts - Wikipedia ›
- How Smart Savers Choose Between a 401(k) or Roth IRA | Money ›
When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.