Is it good to have a 401k and Roth IRA?

Somebody suggested a few days ago to contribute what my company matches in my 401k and then open a roth account my company has it with prudential and they match 100% the first 3% and 50% the next 2% and I'm putting in 7% and I was on prudential website and I can also select what percent I want to contribute to a roth 401k so I thought maybe instead of putting 7 in my 401 drop it to 5 and put 2% in a roth I just don't really know much about it any advice would be appreciated.


Answer:
The difference between a ROTH and a regular 401k is when you pay the taxes.

With a regular 401k, contributions are tax deductible up front. Since you don't have to pay taxes on these contributions that means you can put more in. However when you retire you will have to pay taxes on each withdrawal at your ordinary income rate.

With a ROTH 401k contributions are not tax deductible. However once the money is in a ROTH account you will never have to pay taxes on the money again (assuming you wait until you retire to withdraw it).

Generally if you are making a lot of money right now and are currently in a very high tax bracket AND you expect to be in a lower tax bracket when you retire, then the traditional 401k makes the most sense.

However if you are currently not in a high tax bracket and you expect to save a lot of money for retirement, then the ROTH makes more sense because you will pay no taxes in later years when you have a higher income.

The most important thing above all is to match your employer's contributions and maximize the amount of money you put in. Whichever path allows you to get the highest contributions from your employer is the way you should go. If either direction gets you the same amount, then consider the tax implications I talked about.

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