Building Your Long-Term Wealth With Roth & 401Ks

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Retirement is the most commonly overlooked priority when it comes to investing. For teenagers and those under 30, many disregard retirement because it’s far out into the future. However, this mindset can cost you thousands of dollars in the long run. 

Though it seems early to start investing for retirement, setting aside money sooner will help build enough later on. Even if you decide to stop investing in your retirement once you’ve built sufficient, you can still be well off compared to those starting later. 

With compounding interest, retirement accounts can receive exponential growth in a matter of years depending on how much you’ve invested. 

Here’s a breakdown of Roths and 401Ks:

Roth

A Roth is a type of retirement account that allows you to invest money you’ve received after taxes towards securities. This could include stocks, bonds, ETFs, mutual funds, commodities (gold), and cryptocurrencies. 

Pros

• Tax-Free Growth. Any gains you receive from your Roth account are tax-free. This means when it’s time to use your retirement savings, there’s no penalty or taxes required from the account. 

• Investment Options. With the money you’re investing towards your Roth, you have the option to choose which investments. 

• No requirement. Roths are sole ownership accounts and there are specific amounts you need to fund for this account. Additionally, you can decide how much you want to invest in whenever you’d like. You can set up automatic investments scheduled or decide the amount based on your income at various times. 

Cons

• Small Cap Size. For Roths, the limit for investing is $7,000 if you’re under 50 for the year. This is important to note because there are penalties if you invest more than $7,000 unless you miss the following year (April of the current year). 

• Sole Funding. Due to the tax-free growth benefit of a Roth, you are the sole owner and funding the account with the money you decide to put in. There is no company contribution for Roths. 

401K

A 401K is a retirement account, similar to a Roth, the only difference is there is a company contribution benefit and some minor changes. For a 401K, the money you’re investing into the account is deducted pre-tax. This means the money you take out from retirement will be taxed later on. However, there are tax benefits for a 401K that help reduce the taxes deducted from your paychecks. 

In addition, the investments are strictly limited to mutual funds due to the plans created by investment managers. 

Pros

• Company Contribution. Depending on the company you work for, there are possibilities of having your company contribute towards your 401k. Meaning, that you’ll be able to add money towards your retirement and the company will match a certain percentage for free. This means you’ll be earning free money towards your retirement depending on the requirements to qualify for company contribution. 

• Big Cap Size. Compared to a Roth, a 401K account limit is capped at $23,000 by the IRS (including employee contributions). This means once you have the opportunity to invest towards your Roth and 401K at the same time, setting yourself up for retirement early. 

Cons

• Automatic Investment. With a company contribution and sponsored retirement plan, if you need to make changes, it will take some time to adjust. For a 401K, there is a set percentage you’ll deduct from your paycheck towards the account. So if there are times when the hours differ, then the amount will change from the paycheck. 

• Less Flexibility. Due to the sponsored retirement plan offered by the company, there are a select few investments you can choose from. Depending on the partnership the mutual funds offered at limited.