Nearly all employers these days offer a 401(k) as part of the benefits package.  And quite a few folks contribute at least something to these plans.  You are contributing to your 401(k), aren’t you?  Since you’re a Llama Money reader, I’ll assume you already contribute as much as you need to so that you max out your employer’s match, if they offer one.  Beyond that point, should you contribute more to your 401(k) or should you open a Roth IRA?  Here’s a few benefits of each:

401(k)

• Money is deducted from your paycheck automatically – if you don’t see it, you don’t miss it
• Your contributions are tax deductible for the current tax year
• There’s a big penalty for early withdrawals ( it’s for your retirement, after all )

Roth IRA

• Your entire withdrawals are tax free ( contributions and earnings ) once you are of age
• You can withdrawal your contributions at any time, without penalty

With the Roth IRA, you don’t get an upfront tax break like you do with a 401(k).  To offset that, your withdrawals are tax free ( after age 59 1/2, of course ).  If you think you might be in a higher tax bracket during your retirement days, then a Roth IRA is a fantastic idea.  Since taxes are ( believe it or not ) extremely low in the US these days, there’s a good chance your tax rate will be higher when it’s retirement time. 

The other big thing I really like about the Roth is the flexibility.  If I need the cash for whatever reason, I don’t have to pay any silly penalties to get to it.  It’s my money after all – and I’ve already paid taxes on it.  On the flip side, you really shouldn’t make any early withdrawals if you can help it.  Your retirement is extremely important, and compound interest is what makes it possible.

If you don’t have a Roth IRA yet, you need to, have to, must get one right now.  You can open one online with nearly every major financial institution.  I’m currently using USAA, since my wife is prior military.  I hear Vanguard is great as well.  No matter what, it’s important that you get started now, rather than later.