Roth or 401k?

#1

Hi Jeremy! Im still paying off debt (school loans) but I don’t want to wait any longer to start investing in my retirement. My employer matches up to 5% for 401k or Roth - I’d like to do the Roth, but I see that in your steps, you recommend 401k first. Is there a specific reason for that or does it not matter in this case?

Thanks!

#2

Hey Joline!

That’s awesome you’re doing your 401(k) up to your match, then attacking your debt. That’s just the order I suggest you prioritize things!

That said, I think you’re a little confused about the word “Roth”. The account in which you invest with your employer IS a 401(k). But there are two TYPES of 401(k) contributions. i.e. the money you put in can be treated in two different ways:

  • Traditional: If you choose “traditional” then the money you put into your 401k isn’t taxed at all UNTIL you withdraw it in retirement. That gives you a tax break now, but means you’re on the hook for taxes later.
  • Roth: If you choose “Roth” then you’re taxed on your full salary, but that Roth contribution to your 401k is never taxed again. So your tax bill is a little higher today, but you won’t owe taxes later.

So when you say:

I’d like to do the Roth, but I see that in your steps, you recommend 401k first.

The Roth that you want to do IS the 401(k) I recommend. i.e. in my investing checklist, it doesn’t prescribe Roth vs traditional 401(k), so you can pick either and Roth is a great choice. :slight_smile:

This is often a point of confusion because a lot of time people recklessly refer to a “Roth IRA” as just a “Roth” for shorthand. But IRA is an individual retirement account. Since you’re investing with a match through your employer, it must be a Roth 401(k).

So in short: For sure do up to the 5% into your Roth 401k, then go nuts on your debt.

Does that clear things up?! Here’s a post with a little grid that might help clear up the roth/traditional/401k/IRA confusion: