Question: Stacy in Glendale: Is there any 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, 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). Meanwhile, you can only contribute up to $6,000 in a Roth IRA ($7,000 if you’re 50 or older). There are also income thresholds that limit how much you can contribute to a Roth IRA, but no such limitations exist for a Roth 401(k). So, if you’re a high earner, a Roth 401(k) can be more useful.
On the other hand, Roth IRAs don’t force you to take Required Minimum Distributions (RMDs) starting at age 72 (Roth 401(k)s do). This gives you much more flexibility since you’re not forced to draw down the account, and it especially makes a Roth IRA a handy tool for transferring wealth.
The Allworth 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 then, down the line, roll over the Roth 401(k) into a Roth IRA to avoid RMDs.
Q: Sandy in Harrison: Do you ever recommend requesting a credit card credit line increase?
A: It depends on the reason. If you’re constantly hitting your current limit and already have credit card debt, it is absolutely not recommended. In this case, there’s a good chance you’ll dig yourself deeper into a hole – especially since a 2019 study by the Federal Reserve Bank of Boston found that credit card debt typically increases proportionally to a credit limit increase.
On the other hand, if you’re a responsible credit card user (meaning you pay your bill on time and in full every month) a credit line increase – in theory – isn’t as dangerous. In fact, if your limit increases but your spending levels stay the same, this can actually improve your credit score by reducing your credit utilization ratio.
Here’s The Allworth 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 request an increase, be sure to ask the card issuer if they’ll be making a ‘hard’ or ‘soft’ credit report inquiry when deciding approval; a hard inquiry can lower your credit score in the short term while a soft inquiry does not.
Q: Eric from Ludlow: With inflation still a problem, should I be re-thinking where I put my emergency savings? It’s just not earning much right now.
A: We definitely understand how frustrating this situation is – you’re paying more for a lot of things these days, but savings accounts are still paying practically zilch. But here’s the thing: The priority for any money you have set aside for an emergency is that it’s accessible and ‘safe.’ Don’t get fancy with it. We know we typically say that if you have too much cash in your investment mix you risk ‘going broke safely’ due to the loss of purchasing power. But money in an emergency fund is the exception to the rule. It shouldn’t be exposed to the ups and downs of the market, regardless of where interest rates stand.
The Allworth 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 right now. And be sure to check online-only banks – they usually offer better interest rates than institutions with brick-and-mortar locations. Just confirm the account is FDIC insured.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend or someone in your family has a money issue or problem, feel free to send those questions to email@example.com.
Responses are for informational purposes only, and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Call 513-469-7500 or visit allworthfinancial.com.
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