401(k) vs Roth IRA

As told to Plain Dealer reporter Teresa Dixon Murray

The Expert: Azim Nakhooda, chief investment officer, Cedar Brook Financial Partners, Pepper Pike. Securities offered through Securities America Inc., member FINRA/SIPC, and adviser services offered through Securities America Advisors

Credentials: MBA in finance-investments

Experience: 13 years

Assets under management: $1.8 billion

The Question: Am I better off putting money in a Roth IRA or contributing to my 401(k)? I thought there was some advantage for Roth IRAs this year. If not, is there a rule of thumb?

The Answer: The answer isn't one versus the other -- it's a better understanding of both. A fundamental difference is that you contribute to a Roth IRA with money you've already paid taxes on, and withdrawals then are free from future taxes, while the 401(k) accepts pretax dollars, and distributions are then subject to tax. The other distinction: Roths don't have required minimum withdrawals starting at age 701/2.

You may be able to contribute to both vehicles, depending on your income and use of other retirement plans. Roths have specific contribution limits based on income and age; 401(k)s sometimes have contribution restrictions based on your co-workers and your salary.

The "advantage" you are referring to this year is that Roth contribution limits have a single-year waiver for this calendar year. Anyone can contribute for this year only, regardless of income level. Thus, many investors are considering converting other IRA account balances to a Roth to gain tax-free treatment on those dollars at retirement. However, taxes on a Roth conversion are due up front, so consult your tax or financial adviser for an analysis on this possibility.

Another important distinction is that the 401(k) is an employee-sponsored plan. It is governed by plan documents and offered as a benefit by an employer, often with a company match on contributions. The plan sponsor determines investment choices, match levels and even vesting levels. The Roth, on the other hand, is an individual retirement account, with much more control offered to you, the investor. However, it does not offer a match or other fiduciary benefits like the 401(k) plan.

About Cedar Brook Financial Partners LLC

Headquartered in Cleveland, OH, Cedar Brook Financial Partners LLC is one of the largest independent wealth management firms in Northeast, OH. Cedar Brook’s fifty-plus professionals deliver customized, personal services including comprehensive wealth strategies, investment and insurance advice, retirement plan consulting, and group benefit programs. Physicians, corporate executives, privately held business owners, and families consider their Cedar Brook advisor to be their personal CFO. The firm offers securities through Securities America Inc., member FINRA/SIPC. Advisory services are offered through Securities America Advisors Inc., an SEC Registered Investment Advisor. Cedar Brook Financial Partners LLC and the Securities America companies are not affiliated. For more information, please visit www.cedarbrookfinancial.com.

For more information or to schedule an interview, please contact:
Laura Sheridan
(216) 548-6780

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