Roth 401 (k) or Roth IRA – which is better?
Question: Stacy at Glendale: Is there a real difference between a Roth 401 (k) and a Roth IRA? Should I use one over the other?
A: There are a few important differences to note. For one thing, the Roth 401 (k) has a much higher contribution limit: in 2021, you can contribute up to $ 19,500 ($ 26,000 if you’re 50 or older). During this time, you can only contribute up to $ 6,000 into a Roth IRA ($ 7,000 if you are 50 or older). There are also income thresholds that limit how much you can contribute to a Roth IRA, but none of these limitations exist for a Roth 401 (k). So if you are earning a lot, a Roth 401 (k) may be more useful.
On the other hand, Roth IRAs don’t require you to take minimum required distributions (RMD) from age 72 (Roth 401 (k) s do). This gives you a lot more flexibility since you don’t have to withdraw the account, and above all it makes a Roth IRA a handy tool for transferring wealth.
Allworth’s advice is that both are powerful retirement savings options due to their tax-free growth, so you really can’t go wrong with either. In fact, you could contribute to both and then ultimately switch from Roth 401 (k) to Roth IRA to avoid RMD.
Q: Sandy to Harrison: Do you recommend asking for a credit card increase in credit limit?
A: It depends on the reason. If you consistently hit your current limit and already have credit card debt, this is absolutely not recommended. In that case, there’s a good chance you’re going deeper into a hole – especially since a 2019 Boston Federal Reserve Bank study found that credit card debt typically increases in proportion to an increase in the credit limit.
On the other hand, if you are a responsible credit card user (i.e. you pay your bill on time and in full every month), an increase in the credit limit – in theory – n is not so dangerous. In fact, if your limit goes up but your spending levels stay the same, it can actually improve your credit score by lowering your credit utilization rate.
Here’s Allworth’s advice: You need to be honest with yourself when making this decision. What are your spending habits? How are your debt levels? And if you do choose to ask for a raise, be sure to ask the card issuer if they will do a âhardâ or âsoftâ credit report investigation when deciding on approval; a rigid investigation can lower your credit score in the short term, unlike an indirect investigation.
Q: Eric de Ludlow: With inflation still an issue, should I rethink where I put my emergency savings? It’s just that he’s not making much at the moment.
A: We understand how frustrating this is – you pay more for a lot of things these days, but savings accounts still pay next to nothing. But here’s the problem: The priority of any money you put aside for an emergency is that it be accessible and “safe.” Don’t be fancy with it. We know we generally say that if you have too much cash in your investment portfolio, you risk âgoing out of businessâ due to the loss of purchasing power. But money in an emergency fund is the exception. It should not be exposed to the vagaries of the market, whatever the evolution of interest rates.
Allworth’s advice is that, as hard as it may be to swallow, something as simple and boring as a savings account or money market account is still the best place for an emergency fund in this moment. And be sure to check banks online only – they usually offer better interest rates than institutions with physical locations. Just confirm that the account is FDIC insured.
Each week, Amy Wagner and Steve Sprovach from Allworth Financial answer your questions. If you or a friend or family member is having a money problem, please send these questions to [email protected]
Responses are for informational purposes only, and individuals should consider whether a general recommendation in these responses is appropriate for their particular situation based on investment objectives, financial situation, and needs. To the extent that a reader has questions regarding the applicability of any specific matter discussed above to their individual circumstances, they are encouraged to consult with the professional adviser of their choice, including a tax advisor and / or a lawyer. . Retirement planning services offered by Allworth Financial, an SEC-registered investment advisor. Securities offered by AW Securities, a registered broker / dealer, FINRA / SIPC member. Call 513-469-7500 or visit allworthfinancial.com.