When it’s time to begin saving for retirement, you’ll have so many different options to choose from. The possibilities can become overwhelming at times. Some people get tripped up because they don’t know if they should open a traditional IRA or a gold Roth IRA. Others wonder if they should stick with their workplace tax-deferred 401k plan.
No matter which side of the fence you end up landing on, just know that there are major differences between the two. Today, I’d like to dispel the myths and help point out the differences in each of these accounts.
Before you are through, you’ll know the difference between these two styles of accounts and much more. Plus, you’ll know if you should choose one particular type of account over the other. Or, you may decide to invest your hard-earned retirement money into both styles.
Ready to learn more? Keep reading to discover the difference between a 401k and a gold Roth IRA.
The Unabridged Definition of a 401k Plan
Many of you reading this are likely somewhat familiar with a 401k plan already. Maybe you’ve learned about them at work through your current employer. Or, maybe you’ve heard your parents, grandparents, or other important people in your life talking about them.
In the case of the 401k, it’s a plan that is sponsored by your current or previous employer. You aren’t responsible for opening a 401k. It’s not something that you’d have to fund to open the account. The account will already exist through your employer. You will become a contributor to the 401k by putting a portion of your paycheck into the plan.
The interesting thing about this account is that you’re funding it using pre-tax income from your paycheck. You aren’t responsible to pay taxes on this income right away. This will lower your annual gross income by the amount that you deposit into your 401k plan. As a 401k account holder, you aren’t responsible to pay taxes on this income until you begin taking distributions.
An Interesting Fact about 401k Plans
The next thing I’m about to tell you isn’t guaranteed, but many employers offer it to their valued employees nonetheless. Many employers provide their employees contributing to the 401k plan with an employer match program.
What does this mean? In all honesty, it really depends on the employer and the amount they are willing to match for their employees.
As an example, many employers are commonly willing to match 50% of an employee’s contribution. And they are willing to match up to 6% of the employee’s total salary.
Say an employee makes $83,500 per year. The employee deposits 6% of their salary into the 401k plan. This comes out to $5010. The employer will match this amount, so the employee effectively doubles their contribution with an employer match plan.
Unfortunately, if you wanted to invest in physical precious metals, you wouldn’t be allowed under a 401k plan. But all hope isn’t lost. All you need to do to invest in precious metals successfully is to open a gold IRA account.
Learn more about the best gold IRA companies by reading my top 10 review.
The Complete Definition of a Gold Roth IRA
The most unique and interesting thing about a gold Roth IRA is it’s very similar to a Roth IRA with one major exception. The exception is that you get to invest in precious metals like gold, silver, platinum, and palladium. And you get to do so in a Roth self-directed IRA account.
The definition of a Roth IRA is that you connect with a financial institution and set up an individual retirement account. You’ll have to open this account with an investment firm or bank traditionally. Or in this case, you could open a gold Roth IRA through a precious metals company. Read my top 10 review of the best precious metals companies in business right now.
Once you open the account, you’ll need to set up funding. You need this money to invest in precious metals, real estate, and traditional stocks and bonds if you prefer.
The interesting thing about a gold Roth IRA is it’s funded with after-tax money. This means you’ll fund the account with money that was already taxed by the IRS.
This will have two significant effects on how you handle this account.
Two Significant Effects of a Gold Roth IRA
Since the account is funded with after-tax money, you will not have the opportunity to deduct from your yearly income. Some prefer traditional gold IRAs because they can fund their account with pre-tax dollars and minimize their yearly tax burden. This is impossible with a gold Roth IRA.
There is another important aspect that you must consider as well. And many people happen to love this particular benefit as much as I do.
By funding the account with after-tax dollars, you get to keep everything earned within this account. This is 100% true as long as you do not take a distribution before reaching 59 ½ years old. Otherwise, you’ll have to pay early withdrawal fees, penalties, and taxes.
But on the positive side, this is an amazing opportunity for future retirees. You get to grow your wealth for years or decades and everything is yours to keep. The IRS is never going to ask you to pay 30% or 40% of your money for taxes. You already paid taxes on the money used to fund the account. The IRS is willing to give you a gift by creating an exciting tax loophole for you to exploit.
Do you recognize the value of opening a gold Roth IRA? Are you ready start solidifying your retirement future? Read my top 10 review of the best gold IRA companies first before choosing the right institution to help you.
Gold Roth IRA vs 401k: Eligibility and Contribution Limits
I’ve already touched upon some major differences between 401k accounts and gold Roth IRA accounts. Another area of major differences between the two types of accounts are eligibility and contribution limits.
In the case of the 401k, the main things to know include:
- Employees are eligible to contribute into their 401k plan as long as your employer offers it. Your employer might require you to work for the company for a certain amount of time before access is granted.
- For tax year 2021, the 401k contribution limit is $19,500 per employee below 50 years of age. And employees over 50 years of age can contribute $26,000. Employer match doesn’t count toward contribution limits.
- For tax year 2022, the 401k contribution limit is $20,500 per employee below 50 years of age. And employees over 50 years of age can contribute $27,000. Employer match doesn’t count toward contribution limits.
As far as gold Roth IRAs are concerned, the most important areas to know about include:
- For tax year 2021, total contribution limits cannot exceed $6000 for traditional or Roth gold IRAs for those below 50.
- For tax year 2021, total contribution limits cannot exceed $7000 for traditional/Roth gold IRAs for anyone 50 years or older.
- And for tax year 2022, total contribution limits are exactly the same as they are for year 2021. This is true whether you are younger than 50 years old or 50 years of age or older.
- Gold Roth IRA accounts are not employer-sponsored accounts. There is no contribution matching with this type of account.
Read here to learn more about the top 10 gold IRA companies right now.
Gold Roth IRA vs 401k: Distribution Differences
I’ve already explained the differences in the way taxes are treated between these two types of accounts. I’d like to share more about the distribution process with each of these accounts. Because they are similar yet there are important differences to learn about the two options.
The major differences in distributions between 401k accounts and gold Roth IRA accounts include:
- Both gold Roth IRA account holders and 401k account holders can begin taking distributions at 59.5 years of age.
- Gold Roth IRA account holders who’ve had their account for at least five years can begin withdrawing contributions under the age of 59.5 years. And they can do so without suffering from early withdrawal penalties.
- 401k account holders have to pay a 10% penalty if they withdraw from their account before reaching 59.5 years old.
- The required minimum distribution age for a 401(k) account is 70.5 years of age.
- Gold Roth IRA accounts do not have a required minimum distribution age. The IRS doesn’t require it because they are not going to tax this money again. Remember, you are funding the account using after-tax dollars.
Investors now know that there are big differences between a 401k in a gold Roth IRA. Obviously, each account has its merits. But if you’d like to invest in physical precious metals, you have to go the IRA route. You must open a traditional gold IRA or a Roth gold IRA to accomplish this task.
Are you ready to start investing in your retirement future? The best way to open a physical precious metals IRA account is through a qualified gold broker. I’ve reviewed the top 10 gold brokers working in the industry. Use the benefit of my knowledge by learning about the best companies in choosing a favorite for yourself.